The World’s Factory – A Challenge and Opportunity for China

COVID-19-related PPE and the US-China Trade War have drawn many people’s attention to the supply chain and manufacturing capability of China. Over the last 30 years, China has become the world’s factory, and it continues to expand its territory into the more premium part of the value chain. Will China’s dominance continue? Will the manufacturing industry ever return to the US?

Current State of Manufacturing in China

China has the biggest, longest, and most comprehensive manufacturing value chain at the moment.

The World Bank publishes the total value of manufacturing in US dollars for each year. China accounts for roughly 30% of the world’s total value. China’s total value is about two times larger than that of the US.

Among 500 major industrial product items, China has the top market share for more than 220 items. China has been the top manufacturer for steel since 1996. At this point, China accounts for 53.3% of the world’s production capacity. In the chemical industry, China accounts for roughly 40% of the world’s production capacity. Roughly 75% of the world’s smartphone production capacity is in China.

Because China has the biggest value chain and one of the biggest markets, Chinese hardware manufacturers enjoy a huge advantage. TCL is now the number-one TV brand in the US. Huawei is the number-one telecommunications equipment manufacturer, despite US sanctions. Xiaomi and its eco-system have defeated pretty much every single US-based hardware start-up.


The biggest challenge is the lack of high-end value chain items—more specifically, high-value-added products and high-value-added services.

None of the high-end semiconductor production capacity is in Mainland China. That’s the main reason why US sanctions on ZTE and Huawei are effective. Many mechanical manufacturing products are controlled by European or Japanese companies.

High-value-added service might be a bigger issue for China. RMB is nowhere near a global currency. No Chinese investment bank has expanded beyond China. China’s presence in the entertainment industry is almost zero, with the only exception being TikTok. Most of the high-end software (e.g., MATLAB) is controlled by non-Chinese companies.

China is focusing on the product category which requires labor intensive manufacturing and complete value chain as its beachhead market. A good example is the electric car. Currently, over 50% of electric cars are sold in China. This has attracted a big player such as Tesla to build a factory and transfer technology to China. When Tesla builds a factory, it also brings its supply chain with it. By the end of this year, over 70% of Tesla parts will be manufactured in China.

Will the manufacturing industry return to the US?

Before we look into the data, I’d like to play this video. American Factory shows the biggest challenge to bringing manufacturing jobs to the US: people. Not many US workers are willing to work in the manufacturing industry, especially as compared to workers in China.

The growth of the US manufacturing industry has been slower than 2% and the rest of the country. As a result, manufacturing’s share of employment and share of GDP have been declining. It’s hard to believe that anyone can reverse this trend in the near future.

I am not sure that acquiring these manufacturing jobs is a very good thing for the US. Many manufacturing jobs are moving from China to Southeast Asian countries now. Can the US compete with these countries and maintain a good amount of profit?


China is the largest manufacturer and largest market for over half of products. Because of this huge advantage, China can develop the largest supply chain to meet its demand. The challenge is that China doesn’t own high-value-added products and services. Also, low-end manufacturing jobs are moving from China to other low-cost countries.

For people who want to know the future of the manufacturing industry in China, I recommend checking out the New Infrastructure Creation policy that was announced in 2019. 5G, UHV transmission, high-speed railroad, inter-city rail, charging stations for electric cars, big data centers, AI, and industrial Internet: It all shows China’s aspiration to gain its share in the high-value-added product market.

Role of Government in Start-Ups in China

Many people in the US believe that the Party funds and controls all Chinese tech start-ups. Is this belief true? What role does the government play in start-ups in China? In this blog post, I’d like to unpack this topic a bit.

Government Guide Fund

One of the government’s biggest roles is to provide capital to tech companies. It’s rare for the government to provide subsidies directly to a specific company. Usually, capital is injected via the so-called “Government Guide Fund” (政府引导基金) as an LP. Similar to corporate VCs, the “Government Guide Fund” doesn’t simply focus on capital gain; it must also achieve some strategic goals. Usually, each fund has a specific purpose—for example, to make one city the hub of batteries for electric cars.

The growth of the “Government Guide Fund” really began in 2008 after the last financial crisis. It hit its peak around 2016-2017. Currently, the AUM of the “Government Guide Fund” is roughly $300Bn. This is a significant capital force in the market. As a reference point, the AUM of all VCs in the US is about $400Bn. 

Interestingly, about 80% of the “Government Guide Fund” is set up by municipal governments. Most of them are not in Tier 1 cities such as Beijing or Shanghai. Many municipal governments were able to leverage the “Government Guide Fund” and some other taxes and regulation policies to successfully grow a certain tech industry from scratch.

Some of the “Government Guide Fund” capital comes from banks, pension funds, and LPs outside the US. It’s generally believed that the government is not going to let private investors suffer a huge loss. As a result, the cost of capital for the “Government Guide Fund” is fairly low.

Because the “Government Guide Fund” is usually just an LP, the government doesn’t have any control over the tech companies from the governance point of view.

State-Owned Enterprise (SOE)

Another typical way for the government to influence the tech industry is through SOEs. China is home to 109 corporations listed on the Fortune Global 500—but only 15% of those are privately owned. Although some SOEs are public companies, in many cases they prioritize strategic goals from the Party over pure commercial goals. As a result, SOEs can provide capital, support, and proof of concept projects to many start-ups without a short-term return. The state-owned Asset Supervision and Administration Commission (SASAC) is the largest shareholder of all SOEs. It provides guidance to each SOE in terms of its strategic goals.

However, in recent years, the role of SOEs has been decreasing rapidly.

China’s private sector—which has been revving up since the global financial crisis—is now serving as the main driver of China’s economic growth. The combination of the numbers 60/70/80/90 is frequently used to describe the private sector’s contribution to the Chinese economy: They contribute 60% of China’s GDP and are responsible for 70% of innovation and 80% of urban employment, as well as provide 90% of new jobs. Private wealth is also responsible for 70% of investment and 90% of exports.


A recent key strategic focus of the Chinese government is to adopt blockchain technology and find the killer application. To achieve this goal, various government entities have almost set up a “Government Guide Fund” that manages over $6Bn in capital to invest in blockchain companies. In the US, blockchain VC funds are raising or investing out of funds with total capital of $3.8Bn.

It all started when President Xi endorsed blockchain technology on October 29, 2019. Before his announcement, blockchain technology was really in a grey area. Most VCs were afraid to invest in blockchain start-ups from a regulation point of view.

In addition to the capital, all governments started putting together RFP to try out blockchain technology to support Xi’s endorsement. The tax agency wants to use blockchain to collect taxes, while many municipal governments would like to use blockchain to manage national ID cards. Many of these RFPs are completely crazy and most of them will fail. However, it may help the Chinese government find the killer application for blockchain technology faster than any other market.


The government in China certainly plays a much bigger role in the tech industry as compared to the US government. However, its role is limited and has been decreasing in recent years.

When we take a look at the top Chinese tech companies (Alibaba, Tencent, Baidu, ByteDance, and so on), we see that none of them have received significant support from the government. Actually, most of them are funded by US-based venture capital, and most of them operate in the most deregulated industry in China.

Execution Is Everything – Hyper Competitive Tech Landscape in China

In the US, a start-up can grow into a unicorn in a fairly niche industry. In a hot industry, typically we can find 2 or 3 unicorns at the same time. Start-ups in China are not so lucky. It’s a true winner-takes-all market.


When Groupon started getting traction in the US, many entrepreneurs saw the opportunity. The first Groupon type of business emerged in China in March 2010. By August 2011, 5,058 companies had entered the market. At the end of 2011, one-third of the players had already gone bankrupt. In June 2014, the number of Groupon-style businesses had decreased to 178. Today, the only winner is Meituan. Others either were acquired by Meituan or went bust. By the way, in the US, at its peak, fewer than 100 companies were competing with Groupon.

To be honest, the product and service offering was pretty much the same among all players. What matters is execution, operation excellence, a massive amount of capital, and an aggressive culture. Actually, Meituan was pretty late in joining the other Groupon types of businesses in China.


Another good example is bike-sharing.

At the industry’s peak, more than 70 bike-sharing companies were in China. Every company wanted to use its own color to distinguish itself from others. But there were many more companies than colors to use.

Mobike and ofo, two leading players, raised over $4Bn in total. That amount can deploy 50 million bikes. At one point, Mobike and ofo owned over 95% of the market. Still, in the end, Mobike was acquired by Didi for a fairly low valuation. ofo effectively ceased operations. Now Hellobike is the new winner in this red ocean.

As with Groupon, from the user point of view, the experience of Mobike, ofo, and the 70 other companies is effectively the same. Execution becomes the only way they can compete.

Other Examples

Most of the hot categories in China faced the same challenge.

For example, the Accelerator + Co working space is overcrowded now. There are more than 11,000 accelerators in China. More than 7,000 co-working space companies are operating at the same time. WeWork owns only a tiny part of the market. Pretty much every company is losing money.

The biggest ride-share company in China is Didi. To become the winner, it acquired—or killed—more than 30 ride-share companies, including Uber. To win, Didi did everything possible at the execution level. It even developed a mobile phone virus that can automatically disable competitors’ apps. 

Why “Execution Is Everything” in China

In my opinion, there are three main reasons why “Execution Is Everything” in China.

Poor IP Protection

Until very recently, there were almost no hard tech start-ups in China, as the IP protection was poor in China and it takes years to go through the legal process. As a result, no VC was willing to invest in technology or other Ips., which can create a moat for start-ups. Recently, things have started to change, especially in the healthcare and life sciences industries. However, compared to the US, IP doesn’t mean much.


All start-ups have to pick a side among Baidu, Alibaba, and Tencent. As a result, it’s tough to have more than 2-3 winners in each category by definition.

Didi was backed by Tencent. Didi received a huge amount of free traffic from WeChat. Other apps had to deal with many artificial bugs in WeChat integration.

Mobike’s main strategic investor is Tencent. ofo is backed by Alibaba and Didi. Alibaba is also the main shareholder of Didi.

Aggressive Venture Capital

In 2018, VCs in China invested over $70Bn, which is 14 times higher than the total investment in 2008. The rapid growth of the VC industry in China created fierce competition among VCs, which leads to a very aggressive investment style. Many VCs tend to focus only on high-risk/high-return investments. Valuation went through the roof. In many red ocean industries, the total capital raised became the most important factor in competing with others.

So What?

“Winner takes all” + “Execution is everything” pushed Chinese start-ups to focus on some very different skill-sets as compared to its peers in the US. The culture tends to be more aggressive. Lots of resources are focused on operation instead of R&D. Fundraising is extremely important.

In many emerging countries, the key success factors might be similar to those in China. This explains why Chinese start-ups are having more success in South East Asia, India, and Africa.

Personal Guarantee Required for Venture Debt!? Legal, Accounting, and Finance for Start-Ups in China

In the US, the failure of start-ups rarely leads to the bankruptcy of the founders. In many cases, founders who failed once will become serial entrepreneurs and start new companies later. However, founders in China are not so lucky. In this blog post, I’ll share the key differences in terms of a founder’s responsibility and the root cause of the differences.

What does it mean to be a start-up founder in China?

A few years ago, ofo was the leader in the bike-sharing industry. Many people may have seen its iconic yellow bike. However, as ofo is getting close to bankruptcy, its CEO/founder (Dai Wei) is now on the list of Restricting High Consumption of Judgment Debtors. At this point, Dai Wei cannot travel by plane, stay in hotels with more than three stars, purchase a new house, or send his kids to private schools. Although ofo is a Limited Liability Company, Dai Wei is almost taking unlimited liability for the company.

This phenomenon is very typical in China. Failure of the company almost equals the failure of the founder at a personal level. As a result, many founders choose to take consulting projects to survive instead of filing chapter 11.

Getting a loan or venture debt from a bank is almost impossible in China unless the company is super-profitable. In many cases, getting a loan from a bank requires a personal guarantee from the founder. If the loan is judged to be irrecoverable, the founder’s national ID card will be locked. In China, without a national ID card, one cannot do anything. It’s almost a death sentence for any businessperson.

Many VCs also ask founders to show their commitment by providing a personal guarantee. In many cases, VCs ask founders to guarantee a certain level of liquidation preference. Redemption rights are typical as well, usually linked to some sort of Valuation Adjustment Mechanism (VAM).

So, founders in China must take on a significantly higher risk to start a company. What are the underlying reasons behind this?

Reasons for Personal Guarantee

Multiple accounting books – Potential for accounting fraud

Almost any start-up in China will have multiple financials—at least, actual financials for internal purposes and another set for the tax agency.

In China, to recognize any expense for tax deduction purposes, the company must submit something called “Fapiao”. However, in practice, it’s almost impossible to secure “Fapiao” for all expense items. Many small vendors and shops don’t provide it. To fill the gap, it’s common practice to purchase “Fapiao” from unprofitable companies to create a separate accounting book.

Some companies have separate financials for banks as well.

Because a company has multiple accounting books, the founder can more easily cook the books. It’s not easy for investors or banks to run a full audit. If they cannot trust the financials, one easy solution is to ask for the personal guarantee of the founder.

Corporate governance – Complex portfolio structure

To make it even more complicated, most Chinese companies have many subsidiaries. Some of them may not be owned by the holding companies but, in practice, they’re treated as fully owned subsidiaries. This creates an opportunity for founders to move around the capital from one subsidiary to another so that investors cannot reach it.

One example is the VIE structure. In China, many businesses cannot be operated by a fully owned subsidiary of a foreign company. However, many start-ups that raised money from US VC funds are treated as foreign companies. To solve this issue, typically, a WFOE (wholly foreign-owned enterprise) will establish a VIE arrangement with the actual Chinese company that can operate in China legally. However, the WFOE doesn’t own any shares in this Chinese company. This type of ambiguous corporate structures becomes a breeding ground for corruption.

Tough to file Chapter 11

In China, each year roughly 1.5 million companies go under. Only slightly more than 10,000 companies go through the formal bankruptcy process.

Based on the current standard in China, to file for bankruptcy, a company must meet some very strict requirements. If a company simply has cash flow issues and owns more assets than liabilities, it cannot declare bankruptcy. The government will look into the books to check on whether it meets the requirements. Because usually a company has multiple books, the founders are afraid that they will get punished by the tax agency for malpractice. In addition, only certain types of corporations can file for bankruptcy. For example, a company similar to an LLC cannot file for bankruptcy in China.

The biggest reason might be that the bankruptcy process can take a few years. During this process, the founder’s national ID card will be locked. Not only the founders themselves, but usually also their family members and relatives, will be put on the list of Restricting High Consumption of Judgment Debtors.

Instead of bankruptcy, many founders choose to run away, especially to a foreign country. That’s why so many Chinese businesspeople are willing to pay a premium to purchase real estate in foreign countries and get permanent residence cards.

Immature VC ecosystem

The VC industry has only about 20 years of history in China. Most VCs started after the last financial crisis. Most of them had never started VC funds before, so their reputation is unclear. This makes it difficult for other keyholders (e.g., banks) to establish long-term partnerships with VCs.

Typically, in the US, a reputable VC can attract banks to provide venture debt. This is because banks believe that when things don’t go well, VCs will put in more capital to do an insider round. This is based on the long-term partnership and requires time to nurture.

BAT (Baidu, Alibaba, Tencent) + ByteDance – Tech Giants in China (Part 2)

ByteDance – APP Factory

Early this year, 7 out of 10 Top 10 iOS apps in China were from ByteDance. As an app factory, ByteDance has mastered the method of quickly launching, measuring, A/B testing, and monetizing a new app.

Principles for mass manufacturing apps

One big difference compared to other social network companies is that all tech stack, including the recommendation engine, is shared across all ByteDance apps in all countries. This ensures that all apps will benefit from its strong tech and product team. It also significantly reduces the cost and time to launch a new app. The product manager just needs to focus on the product feature itself.

ByteDance has broken its team into three segments:

  • Tech/Engineering: Retention
  • User Growth: User Acquisition
  • Commercialization: Monetization

Similar to Facebook, ByteDance relies heavily on A/B testing for its decision-making. Once an app proves that it has the strongest retention rate, the company can focus all its resources on promoting it. On the other hand, if an app shows an early sign of decline, the company will shut it down quickly. Recently, ByteDance shut down Vigo Video, which was a very popular app in 2018-2019.

ByteDance started in 2012. Globally, it’s famous for TikTok, which is an app that pushed into the mainstream only in 2016. ByteDance’s core product was Doutiao, a curated news app. Zhang Yiming believes that all social networks come and go. The key to success is to constantly test new apps and catch social trends.

Recommendation vs search

One key product feature for all ByteDance apps is the recommendation engine. The app quickly learns a user’s preference, then optimizes its recommendation engine to encourage the user to spend as much time within the app as possible. Essentially, it makes each app very addictive without any effort from the user side.

This is a very different product philosophy compared to other apps. Typically, media apps expect a user to input a search term and watch specific content. ByteDance flips it around. Whether it’s a news app or a video app, there are almost no user types in a search term for a video. Just like Tinder, a user can swipe one video to another, easily spending a few hours on it.


ByteDance is the most successful Chinese tech start-up in terms of globalization. Before ByteDance, most global Chinese tech start-ups were hardware start-ups. ByteDance’s domain is mobile apps, especially social networks, which require lots of local expertise.

In May, TikTok hired Kevin Mayer to be its new CEO. Since the beginning of its globalization, ByteDance has put a lot of effort into localizing its management team in each country. Compared to other Chinese tech start-ups, ByteDance’s culture is more similar to that of a typical Silicon Valley company: very flat organization, OKR, All Hands, Ask me anything session with CEO, etc. It certainly helped ByteDance expand its global footprint.

At this point, China accounts for only about 30% of TikTok’s downloads. This shows how successful TikTok’s globalization has been compared to others. About 90% of WeChat users are from China. Similar to Facebook, India is the biggest market for TikTok. 

Future growth

ByteDance has raised only $7Bn to date to become the most valuable private start-up in the world. This is significantly lower than Uber ($25Bn), Didi ($21Bn), and other unicorns. If ByteDance wishes to do so, I’m sure it could secure a massive amount of capital for its growth. ByteDance has been profitable since 2015. In the last financing round in 2018, ByteDance raised $3Bn at $75Bn.

ByteDance doesn’t hide its ambition to expand its territory beyond media. It is already testing the waters in the gaming and commerce category to monetize its growing traffic and app downloads.

With ByteDance’s low cost to access capital and strong ability to produce many apps at the same time globally, it can create a serious threat to Facebook, Snap, and other social network companies.