Thu. May 28th, 2020

[Part 1/2] The New Normal with Dianping’s Zhang Tao and JAMM Active’s Chih Cheung21 min read

“Whoever survives will become great, but you need to survive.” – Zhang Tao, Dianping.com Founder and CEO

About our guests
 

Zhang Tao is the founder and CEO of restaurant review site Dianping. In 2015, Dianping merged with Groupon-like Meituan. He currently holds a stake in the combined business, which went public in Hong Kong in 2018. Zhang received an MBA from Wharton School of the University of Pennsylvania in 2002, and returned to China in 2003, when he set up Dianping.

 

Chih Cheung is the co-founder and co-chairman of JAMM Active Limited, a leading global producer of innovative performance fabrics for active apparel. He is also the managing partner of C2 Capital Limited, a private investment company. Chih also serves on the board of Wheels Up Partners Holdings LLC and Talent First Limited.
Previously, Chih was the non-executive chairman of RSI Apparel (China) Limited, a director of RSI Apparel Limited, the non-executive chairman of Yucheng Technologies Limited, the managing partner of Staples Asia Investments Limited, a director of The Taiwan Fund, Inc., the co-founder and chief executive officer of HelloAsia Corporation, the chief executive officer of Crimson Solutions and an analyst at Goldman Sachs in New York and Hong Kong.
Chih holds a Juris Doctor degree from Harvard Law School, a Master of Business Administration degree from Harvard Business School, a Master of Arts degree and a Bachelor of Arts degree from Harvard University.

 

Timestamp
0:25 Guest introduction by Yinglan Tan; 
2:54 Lessons from the ‘03 and ‘08 (Zhang Tao and Chih Cheung); 
12:15 Zooming into trends in this new normal (Chih Cheung); 
19:02 Predictions for the post-COVID world (Zhang Tao); 
23:50 Balancing growth with caution (Zhang Tao);
26:20 Tapping into post-crisis consumption demand and other opportunities (Zhang Tao); 

 

Yinglan Tan: So I want to start off with Zhang Tao. You are one of the few entrepreneurs that have been through [a crisis] in ’08 and I think even before that, as well. So I would love to get your thoughts on what went on when, during the first 2008 crisis or even before that. And how did your company respond and adapt to COVID-19? And how did you adapt to it, and what changes have you seen post that? How did Dianping respond to this recession in 2008 and how do you think this applies to our current recession?

Zhang Tao: So you brought up ’08. Actually Dianping started with the last health crisis, which is ’03. It started right in the middle of SARS, so there’s some parallel there. And we did go through the ’08. In a major crisis like COVID, there will be big change to the whole economy and industries, so some will suffer and some will benefit. 

So generally, I think, in a way, similar to what happened to the SARS – actually, SARS was a big kind of push for people to use, like Taobao at that time. So [when] Ali[baba] was still very small, SARS kind of helped, in a way [because] people [bought] more stuff from home. We kind of see that with this COVID19 [crisis] now and a lot of the online services [are] actually doing very well even during the depths of the stock market crash, you see all these big tech companies actually holding up fairly well. Now they bounce back a lot.

So anything to do with, you know […] people definitely do more online shopping. You look at Amazon stock, [it’s at an] all time high now. They [are doing] more online education. Zoom [saw] incredible growth and food delivery also [saw] incredible growth. [In] countries outside China the adoption curve has just started, [and now] I think it will just go way over the top. 

So I think generally, since a lot of startups here, the people here are in the more, new economy business, online logistics, etc. I’m optimistic. So this crisis has both elements of ’03 and ’08, so always about, you know, a lot of companies kind of [running out of] cash and they will be in trouble. 

So we kind of went through that a little bit. We were planning to raise a new round of funding in the next six months before the ’08 crisis but obviously we didn’t go through the funding; the funding [landscape] was dried up. Fortunately, operations were still kind of small. So meaning the burn rate is not that high. And so we were able to kind of, you know, increase the revenue source and just really push on the cost side. And we actually survived. And it’s a blessing in disguise, we actually didn’t really need money. So [we] saved a lot [on] dilution and actually the company’s healthier because we are going through more revenue and cash quality route. 

So I think, you know, probably all of you guys here have heard it a lot already. I want to emphasize on this is – it’s gonna be focused on the cash. I think that the environment is changing for the startup; the funding [landscape] is gonna be different. We see that actually started in China a couple years ago. [There] used to be a lot of funding, a lot of money; the valuation just shot up the roof. And actually, I’ve been in Singapore for a little over a year and seeing that in the Southeast Asian market; the valuation is just high.

So I think the crisis really brings this to a reality check. So I think all the VCs [and other] investors are gonna be more rational, more cautious, and entrepreneurs should be more cautious in terms of how they grow the business. It used to be the model of just go all the way, burn all your cash, just grow and just raise bigger and bigger rounds. [They were] not too much concerned with the management and the cash flow – I think those days will be gone. So the entrepreneurs are more prudent and more well rounded. And focused on the product. And also focused on the organization development and people development, how to manage your cash and finance. Some of these entrepreneurs will go a long way, and have these opportunities waiting for them. 

Yinglan: Thank you. Now, let’s turn to Chih. And I always say that Chih accounts for 80% of my ideas for investments. He’s also an operator as well, and I would love to get his thoughts on this COVID-19 situation, what he’s seen in the past recession, and what should be our reactions for some of our entrepreneurs in our portfolio?

Chih Cheung: Yinglan, thank you. First of all, I actually agree with a lot of things that Zhang Tao mentioned in terms of, obviously, with every opportunity with every crisis, there’s opportunity. 

If you look back in ‘02 or ‘03, not only in terms of the SARS crisis in the US, you know, the whole technology 1.0 collapse, and then obviously in 2008, the financial crisis. I think for both of them, it makes companies more disciplined. I think before that, obviously valuations [are] high, people are spending more money unnecessarily. 

Having said that, I actually also believe that this crisis is actually much more universal and global than in the past. If you look at what happened in the past, whether it be the tech bubble in 1.0, or the SARS crisis or the financial crisis, it’s limited to either a region, or it’s limited to, for example, a sector, would it be tech or financial services. 

This time it’s actually global in every sense of the word. It’s not limited to any one sector, and it’s certainly not limited to any one region. And the thing that some of the change that’s happening right now is very fundamental. So what I see is that for my business — so as Yinglan mentioned, I’m in a supply chain business, would it be Li & Fung or my own business which does performance fabric for companies like Nike, Under Armour, and LuluLemon — obviously there’s huge changes there. 

One, there was a supply shock, in the sense that all the factories were closed. Now there’s a bigger demand shock in the sense that there’s no orders, because all the stores in Europe in the US are closed. Right? So how do you get around that, and one of the things that you see immediately in the supply chain area is the fact that there’s a huge push to digitization that you otherwise would not see, especially in a traditional industry like supply chain. They’re usually the last to innovate, but because of what happened — customers can come and visit you anymore, they don’t want to come visit you anymore, and the government won’t allow them to visit you anymore. So a lot of stuff is now done through video, through Zoom, through digital. 

So one of the things that’s actually happening in real time right now in the industry is, for example, 3D sampling of design was in the past, people or the customer wants to see the physical sample now they are willing to see 3D samples virtually. In some way [when] demand comes back, it’s actually more efficient. 

Now, in addition to that, obviously, Zhang Tao knows this better than I do, but one of the areas [where] you will see a lot of changes is actually consumption. In terms of what happened historically, in the past 10 years, there’s been a shift of consumption of goods to experiences. Now, the question is, is it going back to consumption of goods versus experience, because people are afraid to travel, at least short term. 

Obviously, the natural thing is delivery versus actually, inside experience with visiting a store or visiting a restaurant. More people are prone to delivery now. The other big thing that’s happening that’s universal and fundamental, is just a general awareness of healthcare. You know, in terms of I think biotech and areas like that, it’s gonna do very well. And lastly, I’m sure all of you and has thought of this experiences right now is that we’re all learning how to do remote collaboration and working. And I actually think that for a company that knows how to do this, well, they’ve actually increased their efficiency.

Yinglan: And now I’ll just bring us to the topic of our session, which is the new normal. And I think both of you briefly have alluded to it. How do you define this new normal that this pandemic is ushering in? From your perspective and operating experience, what are some of the permanent or long lasting effects in terms of technology and businesses and emerging problems that tech founders can solve? Maybe Chih you can take it from your industry in the fabric industry. What are some of the changes that you had to make to your business? And what are the other long lasting effects?

Chih Cheung: Well, as I mentioned just now, Yinglan, one of the things that I think will be a long lasting effect is digitalization. To move to the digital world, something that a lot of traditional companies have resisted, now they are forced to do it. So I mentioned the 3D sampling. So a lot more of the work that has been done in terms of sourcing is going to move to digital. And I think that’s going to have a fundamental shift in terms of speeding up the supply chain and efficiency.

Yinglan: And maybe talk a little bit about the response that you see in some of the businesses you are invested in like WheelsUp and some of the others that you’re invested in.

Chih Cheung: I mean, besides what I just mentioned, one of the things that I told all the startup companies or listed companies like Li & Fung is that you need to do a scenario analysis of the worst case scenario, and then make it worse by another 50%. 

Because right now, you just don’t know. The problem right now is that this is a global issue. So even if your country is fine, if the whole world is not fine, it’s still gonna affect your demand and supply. So [you] need to make sure you control your costs effectively for a scenario [you] probably never thought of that three months ago. 

Cash is really important. I told all my companies to pull their credit line if they have any. And three, use this as an opportunity to really streamline your workflow — the way your company works. Because for every company, you know, especially startups right now, especially well-funded startups that have too much money, I’m sure a lot of the internal tasks today is not very efficient.

Yinglan: I guess if you were to look at some experiences we have in our portfolio, I think the interesting thing that we’re seeing is that some of the founders really react quickly to adversity, and they made the necessary cuts [and] adjustments in their businesses, as well as the right moves to streamline their business operations and some of them even pivoted their business from one model the other to the other. I think you and I were talking about some interesting opportunities out there In the market, which is to look at maybe traditional industries that maybe are facing cash difficulties or short term cash flow difficulties. It’s actually a good time to see how to tech-ify them and, you know, turn them into tech-enabled businesses. I think you briefly mentioned earlier on the very delivery business or ecommerce business, maybe you want to elaborate on that. I found that part of our conversation very intriguing. 

Chih Cheung: I can do a couple of things. One, if you look at our business supply chain, live video chat in terms of meetings, less traveling in terms of digitization of the whole supply chain, that’s kind of obvious for my segment. 

But I’ll give you another good example that I think is quite interesting that might be relevant to one of the portfolio companies. I’m involved with a company that sells cars in the US, and also another company that actually sells housing properties in the US. And one of the things to see is that customers actually don’t actually need to go to the site and actually physically see the product to buy. 

So for example, the property company Redfin is basically a public company in the US. What they’ve done [is] they’ve actually developed a video platform a couple years ago, but it wasn’t very popular. But now they’re really putting it to use. And what they’re doing now is that the agent still goes to the property, but instead of doing an actual showing with people, they are actually doing a virtual showing. And then posting it. 

And over time, that’s just obviously gonna be more efficient. If people get used to it, they change their buying behavior to go, you know what, I can buy an apartment without going there, as long as I trust what the video is showing [me]. So what’s really important is that the quality of the video broadcasting, and some of these webinars, some of the stuff that we’ll learn how to use, whoever knows how to use it right, is going to end up winning, because a lot of other companies are going to go away. 

And two, the same thing with cars. The other thing is that I see that in terms of if you look at the restaurant business. What happened in the past — I can’t comment on Southeast Asia — but in the US, there’s way too many restaurants because it’s kind of a hot sector, restaurants open up left and right. And what it means is that for a good restaurant company that’s a good operator, the cost is actually higher than the normal cases, because there’s too much money thrown in the industry. Well, a lot of the less well-run companies are going to go away. 

So in a weird way, 12 months from now, the better run restaurants are going to end up doing better, because they have the branding [so] people trust them, because of hygiene and because of quality. Two, their cost of goods sold might actually go down. For example, rent, right? Instead of having so many people fighting for that good real estate space, now you have a lot of department stores, a lot of restaurants going bankrupt. So real estate prices should come down for the restaurant. So those are some examples I can give you now.

Yinglan: Great sharing, Chih. Tao, let’s go back to you. We actually have about 10 questions from the audience that  came in since Chih answered his question. So I’m going to go into some of them. I think the [one] question is, “Do the panelists think that things will bounce back to before once the virus is conquered? So was it just like a cashflow shock? After all, interest rates are still low and there is a lot of stimulus happening in various countries.” Tao what are your thoughts on this. Maybe we can take one more and I think a related question is how do you think pre-seed valuations have changed in Southeast Asia or South Asia? 

Zhang Tao: Okay, so how things will change after the virus has been conquered. That’s actually a really big question. One guy I’ve been following and [with whom I] share a lot of similar views is Ray Dalio. So if you guys haven’t read some of his work, I strongly recommend it. 

So this question is not just about the stock market fitness, it’s actually gonna be about geopolitics [and] social structure. So that’s the big question. The view, for me, is I’m not that optimistic in terms of that very big macro trend. So Ray Dalio kind of compared what is happening now to what happened in the ‘29 and ‘33 era right before World War Two. In the US as an example, it’s all paralyzed. The Democrats are going very left and the Republicans become very right like “American-First” and all these things and they cannot reach any conclusions. The income gap has become very big and the interest rate has been staying low for the longest time. The Fed is just pumping money into the economy. And how sustainable is that? People kind of challenged that, since the ‘08 crisis has it really resolved things even though we had the longest bull market in history?

But the really fundamental issue hasn’t been solved. The US survived by just printing money because they have this dollar-centric [economy]. They can do it, not any other country in the world can do it, but that’s how they financed the debt and also the crisis. But is that gonna sustain the US dollar [as] the reserve currency? And also you have this tension between the rising power of China and the existing power of the US and all these ethnic, cultural differences. 

So I don’t know. So the virus could just be the catalyst, maybe […] bring around all these fundamental tensions there. And how’s it going to evolve? So I think it’s very uncertain. And the bounce of the stock mark is so quick. I’m personally not too comfortable. So it just feels like people are still complacent. I could be wrong and I hope I’m wrong. 

And also for the virus itself – will that be conquered in a short time or is it gonna be lingering for another two, three years? Maybe a recurring [virus], until we have the [vaccine] and also maybe the herd immunity. So there are all these big questions and a lot of big factors. 

So I think it’s very uncertain. So coming down to the entrepreneur level, because [the macro level] is too big. It’s only now I have time to think about this. When I was an entrepreneur, obviously, I didn’t have time for those kinds of things. So I would say because it’s uncertain, stay more cautious in terms of how you operate your business and cash flow. 

So be careful because the ongoing environment is very hard to predict. Hope is good, but it may not be good. The best thing is keep yourself alive. Whoever survives will become great, but you need to survive. I know it’s not just half a year, but the two or three more years [in] uncertain times in terms of financing, in terms of valuation, in terms of metrics. So be a little more cautious in terms of your planning.

Yinglan: I heard the duration to be two, three years. And there’s a related question here on startups, on an entrepreneur level that I should ask you. So the question is, how should startups be balanced between short-term reactive behavior long term strategic mindset? Especially for early stage companies should they pivot to take advantage of short term gains, or keep their existing models of longer term prospects, like you said, to survive or should they take the more aggressive steps to accomplish some short term gains like immediate revenue stream. I think that’s something that’s going on in some of our entrepreneurs’ minds. Now, any thoughts on that?

Zhang Tao: Yeah, I think this is not just for entrepreneurs. It’s for any kind of company. I remember 20 years ago at Wharton, Jack Welsh gave a talk, and one quote from this talk, I remember still. He said, “As a CEO of a big company, it’s easy to manage it for the long term, and it’s very easy to manage it for the short term. But the difficult part is always to manage both.” So I think it’s true for any kind of business. 

So how to strike the balance? It’s always the most difficult question. Of course, [say] you’re doing a business and your competitors are not having the funding and your business actually benefits [because] of this current crisis, you should take advantage of it. At the same time, if you spend too much cash, and the funding is not coming along because of some situation where the funds have dried up, how do you manage that? 

So I mean, I cannot give – so it has to be business by business, you have to look at your own business very carefully and make a kind of trade-off. But I will only say [the] macro now compared to two, three years ago when the credit is easier to get, maybe the balance side would be tilted towards more aggressive, but now I would caution against – be a little less aggressive, but still, the balance is in the middle. So that’s my take. 

Yinglan: Those are very good insights. I think that balancing both is not easy. I have one more for you and then we’ll go to Chih. This I think is very relevant for you; [the question] is on consumption. So I think post-COVID, one may see consumers having second thoughts about consumption, and its impact on demand. Are we going to see less growth going forward and how do we react to that? Then I think in Dianping’s day it was very consumption driven. So I would love to hear some war stories from Dianping days on post-crisis consumption demand, and how do entrepreneurs react to that?

Zhang Tao: In the short term, for a country like China, they have a little bit under control now. So the business is kind of going back to normal. So consumption is coming back a little bit. But are we [experiencing] very strong consumption to make up what happened last? We haven’t seen that in China yet. So you go to restaurants and they’re still half-empty. 

And so I think it really depends on this kind of wealth effect, and how people feel how much money they still have left. Maybe people are [going back to their] jobs, even though the virus is conquered, but they’re still maybe very cautious to consume or how optimistic they are with the future, with their future income coming in. 

So I think it’s hard to predict for the whole economy. I’m personally not too optimistic. I think the crisis is not a one time shock; it is gonna linger for some time, with all these things I’ve mentioned about geopolitics. Also another thing I think the economy was already too hot before this crisis and it could be just a moment of reckoning. 

I’m not that optimistic. But, again, it’s actually on the entrepreneur. It doesn’t really matter, the macro view. It is really more about the micro environment you are in and that could be a different story. Right? So if you are in travel, I think [there] could be some permanent effect on travel because people are doing more Zoom now. The offline will move more to online. 

And those trends I think are probably irreversible. It’s a long term trend. But if you are Zoom, you are happy. If you are in online education, you are happy, if you are in online entertainment, it’s a good thing. So forget about the macro, macro is probably not relevant, if you are an entrepreneur. So all these macro, I’m not optimistic, but on the micro side, I’m still optimistic. I think there are opportunities [that] are big opportunities. And anything to do with the online-related, the whole ecosystem will benefit in a big way and will probably apply to the majority of the portfolio companies here. So that’s a huge opportunity.

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