HONG KONG, Nov. 23, 2018 /PRNewswire/ -- 2018 has been an uneven year for global capital markets. The US stock market has experienced volatility after constant surging growth, while Asian stock markets lag and suffer from the lack of any upward momentum. The excitement of cryptocurrency is now in the past and the corrections of the secondary markets pressurize the valuation of the primary private equity markets. In the face of a challenging macroeconomic landscape next year, the top global investment institutions in PE/VC, including China Everbright Limited, recently launched a new round of discussions on trends, opportunities and challenges at the AVCJ Asia Forum in Hong Kong. On everyone's minds was the question of how to resist the uncertainty of the larger picture for economic environment. International investment houses reached a consensus at the forum that, in the era of accelerated technological transformation, industries embracing AI empowerment are leading the core of new economic development and are expected to resist the slowdown of traditional industries.
Wenchou Su, partner of Stepstone, moderated the discussion among Victor Ai, head of China Everbright's New Economy PE, Gordon Ding, managing director of Warburg Pincus, and Tony Zhang, partner of Jeneration Capital about technology investment. The panel focused on questions like how technologies such as AI will change traditional industries, how GP's should adapt to and accelerate its learning curve and what opportunities and challenges await China's AI investments.
The New Normal of China's Economy with AI Empowerment
The pace of the development of China's new economy is ever changing. The just concluded "Double 11 Shopping Spree" has turned out to be a global retail carnival. Within 24 hours, the turnover of Alibaba's Tmall surpassed RMB200 billion RMB with a daily logistical volume of 1.042 billion items; while it took JD only 4 minutes to deliver its first parcel on the same day. For orders under JD's integrated services of warehousing, allocation and delivery, over 90% of these parcels were delivered on the same day they were ordered or the next day. The logistics industry has grown extremely fast with the mature application of AI and IoT in traditional industries.
The amazing efficiency of JD logistics is no accident, Victor Ai said, noting that China Everbright is an investor, that the application and consequent monetization of this data is attributed to the coordinated empowerment of technologies like AI, big data and IoT. In addition, China's AI infrastructure is now quite mature, providing a strong foundation for China's new economy. By 2020, China's data industry will account for 20% of the world's total, making it the global powerhouse in terms of data resources. Technologies like 5G, NBIoT, and narrowband Internet will be further developed with improvements in algorithms and computing power. "China Everbright's New Economy team values the underlying driving role of technology and pays more attention to the application of technology to empower traditional industries so as to realize the untapped capabilities of industries," Ai stressed.
Gordon Ding from Warburg Pincus also agreed that as the demographic dividend comes to its end, online traffic will become more valuable. Internet moguls like BAT had penetrated all parts of people's life through traffic portals like social media, leaving less space for start-ups. In contrast, China's traditional industries still lag behind BAT, which opens a large window of opportunity. The ecosystem built by BAT is already very strong. When it comes to investment, the above areas should be avoided and we should take the initiative to focus on traditional industries with the potential of empowerment development, where investment opportunities can take advantage of emerging enterprises.
Through "The Belt and Road Initiative", the trend of internationalization will become a new driving force for the growth of China's new economy. He believes that large-budget financing event and super-large funds will vanish this year with China's private equity markets maturing quickly.
The new normal of China's economy includes Internet+ and AI+. It brings about unique historical opportunities with the convergence of the new round of technological revolution and the accelerated transformation of economic development from inside of China. Victor Ai warns that, undoubtedly, given that the pace of development is being accelerated by new technologies and new business models, over-valuation is sure to come, leading to industrial bubbles in the technology sector. History shows, however, that great companies are inevitably baptized by bubbles and foam and, with time, the poorly organized companies will be weeded out. China Everbright's New Economy team believes that BAT will not be able to monopolize the AI industries and that opportunities will exist for new generation investors. They predict that "China, with its demographic bonus and data dividend will usher in a golden decade for AI. In particular, amongst many causes, we see a boom arising from the efficient restructuring of traditional industries."
Opportunities and challenges brought by reshaping traditional industries with technology
China's GDP exceeded USD12 trillion in 2017, which means that China is the world's second largest economy; the economic story of China, however, still mostly revolves around traditional industries. If productivity and efficiency of existing industries can be increased, through technological advancement, by 10% to 20%, and new technological advancements can be introduced to industries not yet impacted by technology currently part of the vast "blue ocean", growth will be material.
"Many people argue that AI is in a bubble", Victor Ai pointed out, "and we need to be a keen observer of this possibility, however, with years of practice in investment and asset management, China Everbright's New Economy team is in the right spot to minimize risk and take advantage of opportunity. It is our view that the AI industry is still at an early stage of development in China, version 1.0 so to speak. We feel that at the moment the market has led the development of AI. In other words, entrepreneurs have created what the consumers have demanded. We still think that there is scope not only for our engineers to lead consumers to enjoy products and services that the consumers have not yet imagined, but also for industries that have not yet been 'touched' by AI to advance."
"The biggest challenge for technologies such as AI is how to integrate with and apply such technology to untapped traditional industry in order to, as we like to say, "activating the asset". We happen to think that the best example is NetEase Cloud Music, a platform which has received USD600 million financing, from a variety of firms including our very own China Everbright New Economy Fund, NetEase Cloud Music perfects the user experience via AI empowered music recommendations that are accurate and personalized. We can only conclude that as a consequence of such service, more than 600 million users have subscribed in only 5 years, becoming one of the largest music streaming medias in China."
"In terms of the Blue Ocean, China Everbright's New Economy team is keeping an eye on a number of industries that we feel has underutilized AI including finance, healthcare, security, tourism, real estate, and manufacturing. We think that, given the unique advances of the AI industry in China, that there is ample opportunity to develop the market in Chinese technology globally," said Victor Ai.
GP in the Tech Fund Industry also Need to Learn Faster
"As we all know," says Weichou Su of StepStone, "good market development environment, potential demographic dividend, constantly improved infrastructure and other advantages do not make investment easier. That's because the Chinese market environment is very special, and we need to continuously adjust and adapt to the fast-changing environment."
Recently, in both the Chinese and global secondary markets, new economy and technology shares have lost value. "We need to ask," says Su, "whether the performance of secondary markets impacts the primary market and whether this impact will adversely affect industries. We feel that Chinese equity markets are ripe for an adjustment in valuations, and the capital also comes towards enterprises with true value. It is the same for investment organizations, if GPs cannot adapt and accelerate their learning curve in AI era, they will be left behind by the era."
In the current era of the development of the AI industry, equity investment is now simpler and more straight forward. The front-line investment firms, including China Everbright's New Economy team, Warburg Pincus, Jeneration Capital, and Stepstone agree that GPs should go deeper into the industry together with enterprises and explore the real demand of the industry. Only in this way, can AI be meaningful, and the technology get a chance to be implemented.
In addition to that, GP's need to listen and understand the consumption behavior and habits of the millennial generation, as these young people will be the major consumers of technology. China has more than 360 million millennials, which far outpaces countries like the US where there are 60 million.
Victor Ai concluded that, China Everbright's New Economy will always pay attention to the quality assets that can be improved and enhanced by technology. At present, they manage four funds and have an AUM of USD4 billion. The themes of investment include AI, IoT, consumption upgrade, and media/entertainment. They have invested in 60+ projects over the last 3 years, among which, they serve as the lead investor in over 30 of them. Their investments include nearly 20 unicorns.
