Joe’s Thoughts on Food Safety and Sustainability

Plus a scalable plan to supply safe, sustainable chicken to the world

A resurgence of African swine fever and avian flu once again threatens China’s pig herds and chicken flock, and could spell potential disaster for economic recovery and stability
Given the size and reach of the Chinese economy, the danger of butterfly effects on world food prices highlights the importance of global food safety
Consumers – both in China and the West – are increasingly choosing health and sustainability, so we believe there’s a market opportunity to offer a healthier meat-protein choice
In light of this, we present “Chickenwing Farms” a hypothetical investment plan for a superior sustainable poultry farming business
Our aim is to demonstrate a 10X-profitable way to cultivate chicken that’s safe-to-eat, sustainably and humanely, yet also scalably in a way that can secure the world’s meat-protein supply

Setting the scene – a virus is back!

The last time African swine fever swept across China in 2018 and 2019, it wiped out half of the country’s pig herd.

The impact of the virus rocketed retail pork prices in China from an average of 20-25 yuan per kg in 2018 to a record high of 60 yuan per kg by February 2020.

This pig catastrophe created a ripple effect on the prices of pork and other animal proteins in major markets around the world, exacerbated by the US-China trade dispute and the onset of the Covid-19 pandemic.

In summer 2020 it seemed the virus had been defeated, with Chinese farmers reporting by autumn that pig herds had been largely rebuilt.

Unfortunately, it seems optimism was misplaced. The virus has returned, if in fact it ever left.

Multiple media outlets have reported that several Chinese provinces are seeing a resurgence of the swine fever virus, including Sichuan province which produces about 9% of China’s total pork supply.

Fear of the virus has led to panic and confusion in the pig industry with farmers prematurely taking pigs to slaughter in hopes of stemming a repeat of the 2018-2019 epidemic.

As a result, by last month wholesale pork prices had collapsed to 15 yuan per kg.

But there’s an expectation that overall food prices will rebound sharply this winter when demand for meat is higher and the current pork stocks are used up. These wild swings of inflation and deflation are not helpful as China and the entire world continues to recover from the Covid-19 pandemic – if anything, global society is begging for a return to calm and normalcy.

A pivot to chicken

As pork supplies fluctuate and prices rise, the logical thing to do is for consumers to pivot to an alternative protein source – this is exactly what’s been happening in China over the past 24 months.

According to OECD data, Chinese consumers still consider pork the most important meat protein, consuming 24.4 kg of pork per capita in 2019, far beyond the 14 kg of chicken and 4.1 kg of beef and veal consumed that same year.

Those same figures also show that pork consumption fell nearly 19.5% in 2019 and 6.8% in 2020. Meanwhile, demand for chicken jumped almost 5% in 2018, 14% in 2019, and 1.2% in 2020.

In fact, since 2010, as pork demand has fallen by nearly 2.3% on average each year, demand for chicken has risen nearly 3%.

And while consumption of all meat protein shrank in 2020 due to the contractionary economic effects of the Covid-19 pandemic, there is much optimism that Chinese demand for chicken will continue to grow.

After all, chicken has long been a staple in the south of China. And across the OECD, average per capita chicken consumption was 31.3 kg in 2019, more than twice that of China’s.

A bump of 5% in chicken demand from the 2019 figures across the country would deliver a marginal demand increase of nearly 980 million kg, with an estimated wholesale value of 12.7 billion yuan (~$1.97 billion).

In 2019, the total addressable market for the three main commodity meat products (pork, chicken and beef) in China in wholesale value was a mind-boggling 1.6 trillion yuan (~$251 billion).

Pork made up the largest proportion at around 1 trillion yuan (~$158 billion), while chicken contributed about 255 billion yuan (~$39 billion).

Domestically-produced beef and veal, while making up only 9.6% of total demand given its status as a niche product not widely eaten across the country, nonetheless was worth around 342 billion yuan (~$53 billion) given its high unit value.

Unfortunately, the base volume of demand for beef in China is too low for real scalability.

Interesting to note, the increase in demand for chicken has necessitated large imports from Brazil and the USA because domestic producer growth has been unable to keep up. As much as 8% of the chicken consumed in China in 2020 was imported.

Roadblocks to more domestic chicken

This reliance on imports exists because there are two major limitations to the ramp-up of domestic chicken production to satisfy the growing demand.

The first barrier is increasingly stringent environmental regulations.

Traditionally-run poultry farms are immensely polluting to the local watershed and foul-smelling. People want more chicken but N-I-M-B-Y, especially when you can smell them from a kilometre away.

The second barrier is more malignant – as pork producers are dealing with African swine fever, poultry farmers themselves are facing their own avian flu panzootic.

Millions of chickens have been culled around Asia over the past two years, including in several provinces in China, in an attempt to stop transmission.

This has caused billions in economic losses – but it’s imperative because, unlike African swine fever, avian flu is easily transmissible to humans with a 60% fatality rate. And worryingly, China has confirmed several human infections this year.

So clearly there is demand for chicken from Chinese consumers. But any ramp-up in poultry production would need to, at minimum, be able to account for these two problems.

The answer? A short-chain farming system

The way to overcome those problems is by adopting a short-chain poultry farm design.

The easiest way to understand a short-chain system is to think of a submarine. All the elements for living are enclosed inside an environmentally-controlled space – plus it’s also sealed to the outside so water can’t get in.

A short-chain poultry farm operates with the same closed system idea.

Input of resources (water and energy, whether electricity or from feed) is tightly regulated, and the outputs (waste water, methane gas, heat, compost, CO2, and droppings) are carefully captured and either recycled for reuse or sold.

Not only does this process make rearing chicken a very efficient operation, it also limits potential infection by external vectors, such as avian flu or bacterial infections since there’s no way for them to get into the system.

So chickens raised this way need up to 98% less pharmaceutical support (for example, antibiotics and antivirals).

The impact on the surrounding environment is also limited – since all waste is captured for reuse, next-door neighbours would hardly smell the place.

Integrating the facility design also significantly reduces the footprint required for raising the same number of animals.

Short-chain farm design

A short-chain poultry farm consists of a modular design with a total construction footprint of about 5,000 sq meters, including four growing modules to one processing facility.

Each module (which is further divided into rooms and vertical racks) at maximum capacity has space to accommodate 250,000 animals over a 40-42 day growing cycle.

Annual production is approximately 7 million animals (average 2.7 kg per animal for just short of 19 million kg annual total yield).

During the growing stages, human intervention is kept to a minimum to minimise the possibility of contamination, with the control room placed outside of the enclosed loop.

Environmental monitoring, feed, and facility and animal management are automated with data analysis and intelligent farming to continuously optimise operations.

Based on those capacity figures, we can start to build out our plan for Chickenwing Farms.

Chickenwing Farms, a development plan that can’t even keep up with China’s demand

Our long-term goal is to develop and operate a series of short-chain poultry farms within or adjacent to every major urban population in the country, supplying high-quality “natural” chicken (mostly sans antibiotics and definitely without growth hormones) to local populations.

There is plenty of SOM to accommodate Chickenwing Farms’ long-term growth. Even a 5% growth from the 2019 demand level equates to 980 million kg new demand per year.

This would require more than 51 facilities of our design to fully supply, given our capacity per farm is about 19 million kg.

Our target is to have 10 farms up and running within 5 years. That’s already enough for a massively profitable operation.

Given that poultry demand is highest in southeast China, our first facilities will be established at cities in Guangdong, Fujian, Zhejiang, Shanghai, Jiangsu, Anhui provinces, (total population of 403 million), followed by Sichuan, Chongqing, Beijing, Tianjin (total population of 151.5 million).

The exact development plan and locations would be adjusted according to the attractiveness of grants and subsidies – land, construction credits, equity and loans – offered by districts surrounding major markets that we solicit through bake-offs.

In terms of sales channel, there’s sufficient demand on a B2B level for all of the produce to be wholly consumed by major quick service restaurant chains operating in China.

In fact, Hong Kong-listed Yum China, which operates the KFC chain in China, recently took a 5% stake in one of its chicken suppliers in order to assure itself of supply, highlighting the excess demand in the market.

So selling B2B would form a minimum floor for sales and require very little in the way of customer acquisition costs.

But given the boom of multiple direct-to-consumer grocery delivery and community group buying in China (Hema, Pinduoduo, Meituan, etc), it’s also possible to build a high-yielding B2C channel, bypassing the supermarkets completely with a comparatively little capital or resources.

Long-term, this would be an exciting proposition to build and bring to market a new chicken brand that stands for healthy sustainability, and it would allow us to capture more downstream income by selling direct to consumers.

Capital required and use of funds

The investment needed by Chickenwing Farms for its first facility is about 120 million yuan (~USD18.5 million), with future farms expected to require up to 20%-25% less cap-ex due to experience and improved equipment sourcing.

The 120 million yuan would be allocated for use as follows:

32 million yuan (~27%) for land and construction (gross floor area of approx. 30,000 sq meters) including: hatchery; four growing rooms; and, a slaughter/processing facility
64 million yuan (~53%) for equipment and facilities, including: climate and environmental system; solar power system; incubation equipment; growing equipment; slaughterhouse, food processing and cold chain; surveillance system
24 million yuan (~20%) for working capital

Financial Snapshot

Assuming forecast revenues based on 13 yuan per kg (which is the average 2019 white-feathered broiler dressed wholesale price in China), each facility would generate 245.7 million yuan (~$38 million) in annual revenue and 61.4 million yuan (~$9.5 million) on 25% operating margin.

Payback would be about 3.3 years from the start of chicken production.

The first facility would be financed primarily by new equity (plus city grants, if any), additional locations could be financed by equity plus an increasing ratio of reinvestment of retained profits and commercial loans as market circumstances allow.

Growth is achieved by expanding the network of facilities across the country with a medium-term target of 10 facilities giving the business sufficient scale for a satisfactory exit.

With 10 facilities, we are producing around 189 million kg of chicken, 2.46 trillion yuan in sales and 614 million yuan (~$95 million) in operating profit.

You promised 10X investor returns

I did promise good returns.

Going back to Yum China, in March it acquired a 5% stake in Fujian Sunner Development, a chicken farmer listed on the Shenzhen stock exchange, for an estimated 1.86 billion yuan (~300 million), for a valuation of about 37 billion yuan (~5.7 billion).

These types of deals will accelerate in number as the shift to chicken consumption in China continues and QSR and other food service operators need to secure their upstream chicken supplies, giving investors strong potential exit opportunities through both IPO and M&A.

Looking at a snapshot of comparable companies, the average EV/EBITDA ratio of a group of chicken/food supply companies is about 10.09X, or a slightly higher 12.93X if we just look at the average of three Chinese comparables – Wen’s Foodstuffs Group, Sunner Development, and New Hope Liuhe.

For Chickenwing Farms, with 10 fully operational growing facilities, the business would produce some 189 million kg of chicken per year, which at current wholesale price equates to sales of 2.46 billion yuan (~$380 million) and operating income of 614 million yuan (~$95 million).

Multiplying by the global industry average EV/EBITDA gives an estimated valuation in excess of 6.2 billion yuan (~$960 million).

Multiplying by the slightly higher China industry average gives Chickenwing Farms an estimated valuation of 7.94 billion yuan (~$1.23 billion).

Yippee, we’re a unicorn! And early investors would manage 10X or more on their capital.

Are you sure Chinese consumers want this?

Chickenwing Farms is a hypothetical project, but the numbers are real – they come from a friend’s plan that I looked at earlier this year.

I think this highlights something interesting – that reliable investor returns are available in the “sustainable” space, for well though-out enterprises in a deep market like China.

But not only China because these themes resonate through other developed markets too. The trend of consumers towards increasingly “healthy choices” will only accelerate in coming years.

According to McKinsey’s China Consumer Report 2021, post Covid-19 Chinese consumers are showing key changes that exhibit an accelerating maturity in their spending and consumption habits – including an increasing propensity for healthy choices and a flight to quality.

Furthermore, the McKinsey study found almost a third of consumers reported they are “spending more on fresh foods, in keeping with a heightened focus on healthy living”, while a similar percentage of consumers are “focused on … healthy eating”.

So yes, it’s pretty clear that, Chinese consumers want this. Let’s give them Chickenwing!

Joseph Lo is a serial entrepreneur, startup and growth strategy advisor, and venture investment professional

The Case for a Sustainable Food Future

Endgame for humanity

August 26, 2021 – There’s an $8 trillion dollar market that is fundamental to whether humanity thrives or goes extinct within the timeframe of our lifetime. That makes it the most important sector today for impact investing. What is this market, and why is it so important?

If the extreme weather across the globe this summer – deadly floods in Germany while other parts of the world face unprecedented heat – still hasn’t convinced you that catastrophic climate change is a real threat to human society and life, you should keep in mind the double jeopardy – climate change also means our food system is under attack.

The Financial Times warned last week that effects from this year’s weather shocks are beginning to ripple across commodities prices as the supply of products from coffee to oranges heading into the autumn will be constrained and increasingly hit by inflation.

So as climate change inevitably gets worse, since we’re nowhere near the target to keep global temperatures below 2-degrees of pre-industrial levels, food inflation will only intensify and worsen until it becomes a problem of tremendous proportion for communities across the globe.

The world is not literally starving just yet, but the writing is on the wall – we need to move from complacency into action.

Rising demand for food is simply too great for our present agriculture and food production system to keep up, and the effects of climate change may be the trigger that pushes us over the edge.

Exploding population, 20^th century science can’t keep up

In 1960, there were 3 billion people living on our planet. By last year, the number had risen to around 7.8 billion and the World Bank believes that by 2050 there will be nearly 10 billion people competing for the Earth’s resources.

To accommodate these extra mouths, the World Resource Institute (WRI) figures that food production will need to increase more than 56% from 2010 levels to cope.

But frankly, science hasn’t kept up with the pace of population growth or the impact of rising incomes across the world that has increased demand for meat protein.

Studies show that yields in maize, rice, wheat and soybean production, grown using 20^th century Green Revolution techniques – that is with heavy mechanisation, genetically-modified seed stocks, and intensive use of petroleum-based fertilisers – have plateaued in recent years and begun declining.

But even at current levels of farming efficiency, new farmland twice the size of India will be required to make up the gap to feeding 10 billion people, even though we’re already using up 50% of all available arable land on the planet.

If anything, our present system of agriculture and food production not only can’t keep up with rising demand, modern industrial farming is one of the biggest contributors to pollution and climate change.

By practically any measure, the way we produce, distribute, and use food – the food supply chain – is destroying the Earth. So how we feed a ballooning population without destroying our planet in the process is the most important challenge facing the continuity of the human race in the 21^st century.

Frankly speaking, we can’t, not without a comprehensive overhaul of the supply chain– starting from what we grow, to how we grow it, and how it gets into our pantries and onto our dinner tables.

Sustainable agriculture is the Holy Grail

Sustainable agriculture, or a sustainable food system, is exactly what it sounds like – producing, distributing and using food in ways that allow us to fill the bellies of today without compromising the needs of tomorrow. It’s not organic farming, although in some forms it could be.

The Royal Society’s Sustainable Agricultural Forum defines sustainable agriculture as farming that:

minimises the use of external inputs, limiting the use of fertilisers and pesticides;
promotes soil regeneration through nutrient cycling and biological nitrogen fixation, returning to ideas of crop rotation and away from monoculture;
minimises the use of technological practices with negative impacts on humans and the environment, reducing the impact on natural ecosystems;
utilises human capital to resolve problems of scale, reducing reliance on petrol-powered mechanisation in seeding, harvesting, transportation;
quantifies and minimises carbon emissions; and,
promotes clean water and biodiversity conservation

Contrast these points with the developed world’s intensive industrial agriculture techniques that use large amounts of petroleum products (fuel and fertilisers) and chemical pesticides to grow single types of genetically-modified crops on a massive scale, in the process damaging soils, water, air and climate.

The main problem, however, is that sustainable agriculture requires a “green thumb” to make work – that is, a high degree of skill and knowledge specifically about local conditions that would be accumulated over several generations of farming one location.

By comparison, industrial agriculture requires only replaceable minimum wage workers (or less if migrant and illegal work is used, as is often the case) who can provide supplemental generic labour.

So to move from industrial agriculture to a sustainable model requires a re-injection of lost skills and tools – serendipitously, this happens to be something that modern science and technology can help with, and that venture capital can facilitate with impact investing.

Simulating the green thumb and other strategies

An approach to farming called precision agriculture can essentially mimic the benefits of “local expertise” by building up knowledge more quickly through extensive data gathering and analysis, coupled with smart forecasting.

Advances in sensor deployment, IOT and cloud, and machine learning applied to this space could offer great potential – we’re training AI to offer movie recommendations, why not use it to do something infinitely more useful, like finding better ways to farm food?

Robotics will also bring us closer to the Holy Grail of taking smallholder farming techniques (the OG of sustainability) to scale. Regular crop inspection and data collection, pulling weeds, autonomous seeding and pruning, targeted fertiliser delivery, and eventually even harvesting will be achieved with autonomous service robots.

I am generally averse to genetic engineering and lab-grown materials when it comes to food technology, but new techniques in metabolic and process engineering, biochemistry and synthetic biology have the potential to create new crops and livestock without genetic manipulation that are appropriate for a climate changed-world.

An example of this are bioplastics from modified microalgae being developed by researchers at my alma mater, the University of British Columbia in Canada.

Other examples are efforts at breeding in temperature and drought resistance, protection against pests and disease, being more efficient in water use, and reducing the need for fertilisers – attributes increasingly needed in crop and livestock species but without GMO shortcuts.

Biochemistry is another area with the potential to develop new ingredients that are healthy and sustainable. For example, there are over 200 prebiotic sugars and probiotics in human milk that we know contribute to healthy childhood development, but only a handful have been synthesised.

Imagine the benefits of baby formula that almost completely mimics the benefits of healthy human milk for people in developing countries.

There is a lot to do downstream beyond the farm, through more sustainable distribution, reducing spoilage and food waste, and changing eating habits. The covid-19 pandemic exposed how our food supply chains are remarkably fragile in the face of external stresses, as well as being incredibly inefficient all around.

One-third to half of agricultural produce is spoiled “on-the-vine” when harvesting resources aren’t available at the right time, or in transit while waiting at docks or mishandled. In any case, transporting food over long distances also generates huge quantities of greenhouse gas emissions that is another huge problem for modern logistics.

Social media and e-commerce have the potential to solve some of these issues and foster sustainability – for example, changing household grocery-buying habits and offering new logistics pathways for food.

The $8 trillion market

The benefits of impact investment, at least in providing value for investors, have come under question recently.

However, I believe the sustainable food system is an avenue of investment that will prove beneficial for humankind and also extremely profitable, with immense rewards for investors who get it right.

The market size is easy to see, especially if we break it down in the largest world economies.

World Bank estimates have the global food system accounting for around 10% of the world’s $80 trillion economy, making the total addressable market for “food” worth around $8 trillion.

The European Commission says primary production, including agriculture, fisheries, and food processing, together with retail and services including the restaurant trade, had a total turnover of more than €1.1 trillion ($1.3 trillion) in 2015.

So a typical European household would have spent roughly €4,900 ($5,800) on food and groceries in 2019.

For the US, the topline number is similar. The USDA estimates that all food and food-related industries accounted for 5.4% of the country’s GDP in 2019, or about $1 trillion.

But because there are about 37% fewer households in the US as compared with Europe, each US households spent more than $7,700 per year on food (both for groceries and on eating out).

Additionally, for every $1 spent on food by consumers in the US, 11 cents were accounted for by primary production while the remainder accrued to the rest of the supply chain – transforming, delivering, or preparing/serving food.

For Mainland China, primary production was worth nearly 6 trillion yuan (US$925 billion) in 2018, accounting for around 5% of GDP. Agricultural production employed some 315 million people, between a fifth to a quarter of the population.

According to China Chain Store and Franchise Association estimates, sales in the food and beverage market (including all kinds of restaurants, fast food, snacks and takeaway, bars, and bakeries) totalled nearly 3.9 trillion yuan (US$600 billion) in 2019, up 7.8% from 2018.

Of course, data in China is patchy, but that implies the entire food system in Mainland China was worth more than 9 trillion yuan ($1.4 billion) in 2018, greater than either the US or European markets.

Breaking down into China households, in the 19 tier-1 cities with a total population of nearly 200 million, total spending on food and groceries is thought to have accounted for about 10-11% of per capita expenditures per year or roughly 7,800 yuan ($1,200) in 2018.

Since the average tier-1 city household has 2.3 individuals, a typical household would have spent about 17,490 yuan ($2,700) on food per year, about half of what average households in US and Europe spent.

It’s important to keep in mind the income disparity (maybe 10-20 times) between tier-1 cities in China with the rest of the country, but it’s exciting because it’s still a large, and still fast-growing, market.

Across the developing world, agriculture and food is even more important to household livelihoods.

Agriculture is the main source of employment, livelihood and income for between 50% to 90% of the population in developing countries.

Since agriculture is basically the only thing that provides security and has the potential to bring people and communities out of extreme poverty, efforts to create a strong food system in the developing world are all the more important for global development.

Invest – the returns are already here

So the moral case for investing in a sustainable food future is well-made. There’s simply no doubting this category of investment’s ethical weighting. Save the planet, save humanity’s future.

But it’s not unfair to wonder if the case for return-on-investment is just as strong – after all, as investment professionals, it can’t all be about altruism. We need to seek returns for our investors’ funds as well as their trust.

It’s safe to say that, in 2021, investors no longer have to worry about whether there’s a strong market for their sustainable food investments.

Not only are startups in this space being well-funded, there is also a strong market for Series B and beyond follow-on investments. And exits are well-facilitated, whether it’s through corporate M&A, or IPO via traditional listings or the SPACs route.

According to AgFunder, a sector fund that tracks “agrifoodtech” deals in its annual reports, total deals in this space have consistently risen from $6.4 billion in 2014 to $30.5 billion in 2020.

In fact, over 3,000 deals were completed last year, a growth of almost 35% over 2019.

Total investment dollars were split almost equally between startups in upstream and downstream activities, although the median deal size for upstream investments was about 40% larger at $2.33 million. There were around 70% more upstream deals done as well.

This makes sense given the investor interest in processing, logistics and transport last year, as the pandemic disrupted traditional distribution systems. There was also tremendous interest in alternative proteins given the success of Beyond Meat’s IPO in 2019.

Moving forward

Feeding 10 billion while working to protect the environment will always be a challenge, and it would be asinine for me to make some cheerleading conclusion to this blog piece in light of the challenges ahead.

But I believe that the innovation and science exists to solve the world’s food problem in a sustainable way – and that the conditions exist for investment capital to support it. So what are we waiting for?

(ends)

Beijing is smashing its tech industry!

Should venture capital in China be afraid?

(July 29, 2021 – Beijing) After two years of slowdown and volatility in China’s venture capital sector, this year – 2021 – was supposed to be the start of a big recovery. Tencent, which made 82 investments in the first quarter, co-led a US$2 billion investment into community grocery shopping platform Xingsheng Youxuan early in the year. Meanwhile, Sequioa Capital China did 55 deals in the same period, including a bet on luxury e-tailer Ssense that valued it at US$4.1 billion. These, and other deals, were supposed to signal a return of confidence to the sector.

Instead, Beijing has seemingly started to smash the country’s own tech industry – this week, more than half a trillion dollars of shareholder value in Chinese tech companies evaporated overnight from stock markets around the world. In the edtech and private tutoring sector, some companies, including New Oriental Education and TAL Education Group, have lost 80-90% of their value this week alone since the government announced plans to ban private tutoring.

The trouble started late last year when the government cancelled Ant Financial’s world record IPO just days before launch and then started dismantling the company. Alibaba, Ant Financial’s sister company and also controlled by Jack Ma, was handed a multi-billion dollar antitrust fine along with other punishments, like having its web browser removed from app stores.

A who’s-who of Chinese tech names have followed Ant Financial, Alibaba and the edtech companies into Beijing’s bad books. Didi Chuxing, the ride-hailing platform, has lost nearly half its market capitalisation since its June 30 New York IPO after it was cited by Beijing for breaches to data security laws. Didi has also had its apps removed from app stores and has been forbidden from signing up new users, a punishment which, as of July 29, has not been lifted. Meituan, the food delivery app, was reproved this week for exploiting its delivery workers – further remonstrations may be forthcoming.

Mr Ma’s arch-rival, Tencent, has also not gone unscathed. Tencent has steadily built its music arm into a juggernaut that controls more than 80% of music streaming in China by acquiring exclusive music libraries – last week Beijing deemed this monopolistic and ordered it to open its exclusive music licensing deals. On Wednesday, authorities said Tencent’s flagship Wechat app also violated data security laws and, as punishment, it has also been forbidden from signing up new users indefinitely.

While every government is entitled to make and enforce laws that it feels are in the public interest, the suddenness and severity of this crackdown has been shocking to many venture capital investors and entrepreneurs. Many companies – not only startups, but even publicly-listed tech stalwarts – are in danger of being throttled to death.

For many people, even those people used to reading the tea leaves of party, bureaucracy and big business in China, the events of the past 6-7 months have been unsettling, nerve-wracking and bewildering. What’s going on? Who’s ordering these crackdowns? What is the end game? None of this is clear, especially since the government and the general secretary, Xi Jinping, continue to insist that technological advancement and innovation remain the key priorities for China. If that’s true, then why is Beijing targeting the country’s entire tech industry?

But notice something interesting? Beijing hasn’t been cracking down on the country’s entire tech industry. Companies that align with the ‘strategic emerging industries’ blueprint unveiled last autumn – which promised support for building world-class capabilities in semiconductors, industrial automation and robotics, AI, biotech and other deeptech sectors – still enjoy Beijing’s full backing. In particular, the frenzy to build a world-class domestic semiconductor industry continues. Huawei, SenseTime, SMIC and other deep tech firms seem to continue enjoying official sanction.

So maybe it’s not “Tech” (with a capital T) that Beijing is smashing – rather, it’s the consumer-facing internet, e-commerce and social media companies that are too often, and carelessly, labelled “tech” by investors. Is it possible that Beijing has finally come around to the view that companies such as Alibaba and Tencent, rather than creating new national wealth and spurring innovation, successful though they are at making money, are nothing better than leeches?

There’s a term for this in economics – it’s called ‘rent-seeking behaviour’, where someone exerts effort to increase their share of existing wealth without creating new wealth. For instance, most consumers are fond of the new community grocery shopping apps that have emerged in the past two years believing that they make life more convenient, and hence must contribute to positive productivity. Yet the predatory pricing behaviour of these venture capital-backed startups – selling at below cost to undercut local groceries and supermarkets – impose significant negative economic costs on existing local businesses, not to mention the social costs when offline stores are driven out-of-business

The Beijing-based policy analyst from Gavekal Dragonomics, Dan Wang, writing in his blog, has for several years believed that the party viewed the consumer internet as a “net negative for technological developments”, drawing away both capital and the brightest minds from important fields such as materials science or semiconductors, into social media, e-commerce and game development. Writing at the end of 2020, Mr Wang said that, after a reading of the entire year’s back catalogue of Quishi, the Chinese Communist Party’s flagship ideology and theory journal, a wider crackdown on the internet companies could occur.

Viewed through this lens, the current crackdown on the internet companies must be part and parcel of a wider strategy to strengthen China’s deep tech and innovation, as described in that ‘strategic emerging industries’ blueprint. Instead of letting the free market allocate resources into whatever produces stock market profit (a strategy which produces Jack Ma’s, Xu Jiayin’s, and Richard Liu’s), Beijing wants to direct China’s industrial mix into what they believe will best serve the country’s strategic interests going forward.

What is China’s strategic interest? Ultimately, it’s to ensure that if China ever waged war against the US, Japan or India, it would have the hardware to emerge victorious. You would need technology to build jet fighters, missiles, satellites and tanks. You need chips to power all that hardware, and you need software to run on the chips. And instead of buying all this stuff from Russia (because who knows when Putin might be the enemy again?) or acquiring it from the West through commercial and academic technology transfer, ideally it would all be homegrown and homebrewed to gain the maximum strategic upper hand.

I bet when the general secretary considered what kind of technology he wants China’s scientists and venture capitalists to be working on, he probably doesn’t want them wasting time on stuff that’s just fun and frivolous, like Tiktok algorithms, movie streaming, League of Legends and defi.

And so, should venture capital in China be scared? Maybe yes. Definitely yes if your portfolio is skewed to e-commerce, social media and consumer internet sector startups, or you specialise in funding business-to-consumer firms – Beijing’s 14th Five-Year Plan has nothing for you. Your best bet is probably to focus on expediting an exit strategy or finding a pivot. The crackdown against consumer internet firms will continue and, I believe, could soon get much, much worse. It’s not “noise” as some international investors hope this is. This is a once-in-a-generation reshaping of industrial policy to reflect what the general secretary believes China needs going forward.

But Beijing’s strategy will reward deep tech, or “hard tech” as it’s more commonly referred to in China. So if your capital is interested in what the Party perceives as being strategically important to China’s forward development, you’ll be fine.

Joseph Lo is a serial entrepreneur, startup and growth strategy advisor, and venture investment professional

Joe’s EV Manifesto

Or the New Kandy-Kolored Tangerine-Flake Streamline Baby

“I’m sure you and your team are constantly thinking about all the same issues of scalability, competition, changing technology, and financial differential between the large players and the startups” – MBA classmate and banker upon discussing my latest project advising an electric sports car startup

I’ve been working with a Hong Kong-German electric sports car company over the past couple months, offering my advice and support in a corporate finance and strategic advisory role. In this time, I’ve had ample opportunity to see and consider the disruptive forces that are reshaping the car industry. It’s been a fascinating ride, even if it hasn’t been super smooth autobahn cruising. Despite the growing interest in environmentally-sustainable transportation, investors still seem (a) skeptical of any company that doesn’t have incredulous claims of reality-defying novel technology (ahem, Nikola), or (b) fearful of vengeful incumbent major car companies, even though the reality is that much of them have been skirting bankruptcy since the mid-1980s (especially in the US, but even in Japan) or returning single-digit operating profit margins well below their cost of capital. But we’re getting there.

Profound Disruption Is Nigh!

The car industry has been around for a little more than 100 years since Carl Benz invented the first practical automobile in 1885 and Henry Ford figured out how to produce them profitably in large numbers in 1908. Outside of a few blips (notably General Motors’ EV1 in the mid-90s and, at the dawn of automative history, electric horseless carriages like the Baker Electric), the first century of cars has been dominated by internal combustion engine (ICE) technologies.

In recent years, concerns about energy security and climate change have pushed governments and consumers to search for an alternative to the ICE car. For two decades various contenders emerged – burning biofuels or hydrogen to give the ICE a green path, the hydrogen fuel cell to produce electricity with only clean water as the byproduct. But of all these competing technologies, it’s clear the electric vehicle has emerged the winner. Boston Consulting Group believes that, by 2030, more than half of all new cars sold in major markets will be electrified vehicles of some sort, up from 8% in 2019. Battery electric vehicles (BEV), cars powered solely batteries as opposed to hybrids, will account for 18% of all new car sales by the end of this decade. McKinsey thinks that in some markets, like China and Europe, BEVs will make up 50% of the market by that time. The BEV industry leader, Tesla, already outsold Mercedes-Benz and BMW in the US market last year.

The switch from cars fuelled by petroleum to ones running on electricity is, literally, a once-in-a-century transformation. The last time an analogous industrial shift occurred was the sea change from film to digital photography. Remember when you had to take film to the store to be processed and printed into pictures? That was how it worked for the first hundred years of photography, since George Eastman invented celluloid photographic film and a camera to use it in 1888. At its peak about a hundred years later in the 1990s, Eastman Kodak’s revenues peaked at over US$16 billion with a market capitalisation of US$30 billion (in today’s money that’s over US$26 billion in revenue and a US$50 billion market cap). Now? Kodak isn’t even a one billion-dollar company any more.

Bottomless Financial Resources of the Incumbents?

How does a comparison with the business history of photography auger insights for the car industry? Like the film photography business, the major car players have had a century of making and selling ICE cars to consumers. The late Clayton Christensen of Harvard Business School showed in his research that it’s virtually unheard of for major industry incumbents to disrupt their own businesses by adopting new business models which will cannibalise their existing ones. Returning to the photography example, it’s important to note that Kodak had, in fact, invented digital photography. In the late-1990s as the industry shifted from film to digital began, Kodak was in the best position (both financially and market share-wise) to migrate its photo-taking consumers to the new technology. We know how this story ends.

There’s no evidence to suggest that it will be any different in cars. General Motors was the first major, again in the late-1990s, to experiment with its EV1. By all accounts, the EV1 worked (despite the battery tech limitations of the time) and was popular with early-adopters. Yet GM chose to end the EV1 experiment by 2002 because it believed EVs would ultimately be less profitable than just continuing its ICE business – after all, the incumbent car companies all have a huge infrastructure and history producing and providing after-sales service for extremely complicated ICE cars. Already there is pushback from labour unions (especially in Germany and, to a lesser extent, the US) who fear the lower complexity and greater reliability of electric cars will further decimate their members’ jobs.

It’s not just GM either. Fiat Chrysler Automobiles (which owns the Fiat and Chrysler brands, obviously, but also Ferrari, Maserati, Alfa Romeo, Lancia, Jeep, Dodge) is paying Tesla a total of US$2 billion from this year through to 2023 for the right to pool Tesla sales with its own, in order to comply with European emissions rules (and without saying, to avoid building its own EVs). FCA claims it will invest US$10 billion to develop its own EV models in the next few years, but I wouldn’t hold my breath waiting. And the Japanese – especially Honda and Toyota – remain oddly obsessed with developing hydrogen fuel cell technology to power their cars of tomorrow, even though we’re perpetually decades away from a hydrogen infrastructure.

The CEOs of GM and Ford promise to throw billions of investment dollars into EV development. GM’s Mary Barra said the company will spend US$20 billion by 2025 on electric and autonomous tech, with the goal to sell a million EVs a year in the near future. Ford said it plans to spend $1 billion on the same goal. In fact, Reuters reported in March that Ford and GM’s own production forecasts expect that less than 5% of their combined vehicle production by 2026 will be EVs, or about 320,000 units. By comparison, that’s fewer cars than Tesla sold in 2019.

But Will They Successfully Evolve?

Even where a major car maker buys in to the notion that a sea change is coming, there’s no guarantee it can successfully transition its brand to EV. Brands have inherent DNA evolved over a period of time. After a tectonic shift such as from ICE to EV, there’s a question of whether consumers will continue to identify with the brand’s values. The Volkswagen Group (which includes Volkswagen, Audi, Porsche, Seat, as well as other smaller brands) is making a concerted EV pivot. I can see buyers easily making the mental switch from ICE Golf to electrified Golf. But I am less convinced that Porsche and Audi customers will support an electrified model range from those premium brands. Is an electric Porsche 911 (sans flat-six engine in the rear of the car) still a Porsche 911? This is an important question because, not only do models like the iconic 911 constitute its brand DNA, profits are indubitably skewed towards them. Volkswagen, as a group, reported an operating margin of just 6% in 2019. But Porsche, as an operating unit, contributed an operating margin of 16.4%, about 2.7-times the whole. Globally, the premium car segment accounts for just 13% of sales but over 40% of profits.

To me, it’s crystal clear. When the dust settles over the car industry’s disruption, the new major players are probably not going to be the big brands we know and love today (with some exceptions, of course). The new players to admire are going to be today, or tomorrow’s, startups that come with little to no ICE baggage.

What Kind of EV Startup Is Likeliest to Succeed?

If we accept the thesis that the car brands of tomorrow will be new ones, is it possible for us to forecast the qualities that will define who succeeds? The answer is, of course not. No one has a crystal ball to see into the future. That’s why, as I speak to investors in the EV space and EV entrepreneurs, despite the near unanimous admiration of Tesla, there is still an overwhelming fear of the major incumbent car companies. After all, when a snow ball comes rolling down the hill at you, it’s hard to find the courage to stand your ground. But this thought exercise will allow me to segue the narrative to talk about how I would architect a new car company.

Besides the threat of incumbent major car companies (apparently with oodles of cash) successfully defending their market space against EV startup competitors, there are two other fears that I find frequently raised:

Maintaining technological leadership
Difficulties in scalability (ramping up) of car manufacturing

Maintaining Technological Leadership

Tesla’s perpetual self-promotion has spoiled investors and consumers who, I think, now unrealistically expect that the design of every component from every EV maker must be self-developed and cutting edge. It’s true that Tesla has at least a one-generation lead on other electric drivetrain developers; after all, the company was founded in 2003 and based originally on induction motor technology that originated from GM’s defunct EV1 program. In fact, there’s a common thread running from the EV1 to the original Tesla Roadster: both drivetrains were originally designed by an engineer named Alan Cocconi whose AC Propulsion tzero electric sports car inspired Elon Musk to invest in (and eventually takeover) Tesla.

Tesla EVs contain no intellectual property so fundamentally groundbreaking that it constitutes an unclimbable barrier for other entrants. Rather, the company has, over 17 years, committed to incrementally pushing EV technology forward to where it now just about meets mass market consumer expectations. I believe the depth of Tesla’s development is its real unique selling proposition. Frankly, no competitor comes close to the amount of data and, hence, refinement that Tesla has been able to accrue and build into its drivetrains. But it’s important to remember that head starts are tenuous in the tech space; according to a recent report in The Economist newspaper, there are over 250 groups (startups and established companies) trying to come up with a better motor.

Besides electric motors, there are three other major technologies in every EV: chassis, batteries, and software. I’ll proceed from worst to best.

First, car chassis. Hang on, why is Tesla’s chassis the worst part of their cars? On a subjective level having driven a Tesla Model 3 Performance package and a BMW 330i back-to-back, I feel the BMW is far superior in its driving characteristics – its suspension is better, its steering is more direct, the entire car feels much more stable, solid and confidence-inspiring. On an objective level, there are many reports detailing Tesla’s immature car-body design and quality control issues. These include design problems such as inadequate drainage so that water and mud accumulates in large quantities inside body panels, as well as just cars that are delivered to buyers with obvious manufacturing problems like suspension or door mechanisms that are not installed correctly. I’ve never owned a Tesla, though, so take that with a grain of salt.

The investment bank UBS commissioned an independent tear-down of the Model 3 in 2018 that found below average build quality compared to competitors in the same price range. It also said serviceability was questionable, as its components were overly complex, expensive and hard to service or replace. Munro & Associates, an engineering consultancy, also conducted its own independent teardown of a Model 3 and found that it didn’t seem like it had been designed by people who had experience mass-producing cars. To Tesla’s credit, it has listened to these critiques of its chassis design and, for the upcoming Model Y, has re-engineered its design to allow for more manufacturing simplicity.

Second, batteries. Tesla’s head start over everybody else has given it an advantage in battery technology, although again probably not as much as most people assume. Tesla’s claims to “build its own battery packs” just means taking thousands of 18650 lithium solution cells (each is roughly the size of an AA-battery) that it sources from Panasonic, LG, and CATL (a Chinese company), and then wiring them together into battery packs that fit into its cars’ chassis.

To be fair, Tesla’s batteries are monumentally assisted by the data and experience accrued over 17 years of testing and development. Tesla has made smart investments in battery technology development; it funds one of the world’s leading battery research labs at Dalhousie University in Canada, giving Tesla first run of advancements made there. This experience and research means that it can work with its suppliers to adjust the chemistry of its cells as it fine tunes what works and what doesn’t. The downside for Tesla is that these incremental improvements are not likely to be proprietary for long, since its suppliers are also tinkering for other customers as they go.

Incremental improvement is also likely to have its limitations as investments in lithium solution-based battery technology (which by now is now fairly mature) hit a wall of diminishing returns. The holy grail of EV battery technology is the dicephalic monster: a battery that lasts a million miles, and costs just US$100 per kilowatt-hour (which implies parity with gasoline). The easy gains have already been had with prices of lithium batteries falling from over US$1,000 per kwh just ten years ago to now being less than US$200. To reach the holy grail and beyond, the next generation of battery technology will not be continued incremental improvement but a radical shift to solid-state lithium batteries. This is something that Tesla has no advantage over others. In fact, it may prove to accelerate obsolescence of Tesla’s battery investments. To overcome supply bottlenecks, it has invested into battery cell manufacturing joint-ventures with Panasonic which will not convert to manufacturing solid-state batteries without substantial extra investment.

Third, software. Where Tesla does have a distinct advantage over its competitors is its software (Elon Musk and his Silicon Valley team’s core competency). A Tesla EV is built more like a iPhone than a BMW. Why? A typical BMW 7-series has more than 150 separate electronic control units to control all the different functions of the car. A Tesla Model 3 has one integrated central control unit of Tesla’s own design (including its proprietary chipset) that controls everything – the electric drivetrain (motors and batteries), AutoPilot, and the infotainment system. This also allows Tesla to continue working on software updates long after the car has left the factory, unlike any other car ever made. A lot is made about how these over-the-air software updates change the interface changes with new infotainment functions and games, but the real advantage is that Tesla can continuously improve drivetrain efficiency as it processes more operating data. The self-driving software, which is not yet at full autonomy, can also be updated without physical intervention as Tesla further develops it.

More than anything else, I admire the integration of hardware and software architecture in Tesla cars. As marketers and investors, we talk often about what genuine unique selling propositions that a product has. Most consumers of cars don’t even realise how game-changing this integration really is, and how much it affects vehicle performance optimisation.

Think about how car models from legacy car makers get improved from year to year. They have test driver-engineers who evaluate their products and look for improvements to put into the next models. They poll customer focus groups. They survey their dealers and repair centres to look for chronic design issues to be corrected. These data points get collected and might find their way into new models a year or two down the line. For cars already purchased, though, you’re stuck with it as it is forever. The car companies rarely try to change cars already out the door, except in recalls for potential major liabilities.

But consider the amount of data a car is constantly throwing out and you’ll understand what the car makers are leaving on the table. Battery pack temperature, motor temperature, drivetrain power/torque characteristics, all at different points of the power, torque, speed curve. Driver assists – suspension, brakes, active aerodynamics, stability program – affecting handling characteristics for a particular driver and having feedback affecting the performance and reliability of the drivetrain. All of this data can be gathered and sent back for analysis, in real-time, with the outputs mined for improvements to your car’s behaviour that can be distributed a few weeks later in the next over-the-air update. That’s how your iPhone works. That’s how Formula One race cars work. And, thanks to Tesla, that will be how all new cars will work in a few years’ time.

Difficulties in Manufacturing Scalability

An electric car is mechanically much simpler than its ICE counterpart. A typical ICE drivetrain contains over 1,400 components, while an EV might only have 200. The result is a simpler supply chain and much lower capital requirements in manufacturing. According to Goldman Sachs research, the typical EV factory can have a final assembly area that is half the size, half the capital investment and with 30% few labour hours per vehicle produced. The relative simplicity of EV manufacturing is probably a big reason for the proliferation of electric car brands in China.

Still, high volume production is not necessarily the best path to scale. High volume implies higher revenues. But the biggest problem for car makers trying to push their products in high numbers is the inevitably resulting poor margins. Fiat Chrysler Automobiles (FCA) late CEO Sergio Marchionne famously acknowledged in his 2015 presentation “Confessions of a Capital Junkie” that FCA and most of its peers consistently failed to return their cost of capital and were systematically destroying shareholder value.

The funny thing is that, Tesla, for all its technology innovation and disruption, is building cars the same way that doesn’t work for the legacy car makers. Investing huge sums into inflexible assembly lines around the world. Stamping car bodies out of steel sheets using expensive, heavy dies that can’t be repurposed for other models or changed. Tesla has earmarked investing over US$10 billion in its Shanghai Gigafactory (one of three or four such factories it plans around the world) for 500,000 car per year maximum capacity, basically for a single model, the Model 3 and Model Y crossover variant. That is a lot of sunk capital. In fact, Tesla’s current return on invested capital (ROIC, how well it’s generated revenue against the capital invested in the business) is around 4%. Sure it’s early days for the company, since it only made and sold around 370,000 cars last year. It will take some time for all its manufacturing capacity to be fully utilised. Its weighted average cost of capital is currently around 11.5% though, nearly 3 times higher than ROIC.

So what’s better? For sure, I believe that a focus on having a positive ROIC is preferable in any business. As an investor and manager, I would much rather manufacture 25,000 cars per year with a 20% operating margin, than to manufacture 500,000 cars per year with a negative ROIC and single digit margins (or worse).

A new EV maker has the opportunity to disrupt dirty ICE transportation. And there is also a once-in-a-century opportunity to disrupt traditional car manufacturing by de-emphasising the dumb focus on chasing high volumes and re-emphasising decision-making for profitability. Both need to be disrupted, urgently. And it can be done easily through flexible and simplified assembly processes, and designing the manufacturing facility to be able to make different model variants without the need for retooling. A new car maker is, by definition, putting together new production facilities – so why wouldn’t you do it with efficiency in mind from day one?

The Beginning (Of a New Kind of Car Company)

So if I were putting together a new car company, how would I do it? First off, I would commit solely to Battery-EV technology, rather than a messy hybrid-electric approach that will invariably be less efficient. Nor would I commit to pie-in-the-sky technologies, such as hydrogen-combustion engines that require a refuelling infrastructure that may never arrive, or fuel cell technologies that likewise may never be commercially viable. BEV technology is advancing quickly enough that parity with gasoline is almost here and certainly attainable within this decade.

Secondly, I also don’t believe that every EV startup needs to invest heavily into developing a wholly-comprehensive proprietary technology portfolio. Technology, especially battery tech and materials tech, is advancing too rapidly – it’s too easy to commit to a wrong path, which could be fatal for a startup. This makes sense from a business perspective too. Making battery cells is a whole different business from making cars, requiring a completely separate business plan, competencies and financial resources. It’s akin to expecting General Motors to also build refineries to refine and sell the gasoline that powers cars, which doesn’t make sense at all. Much of these things can, and should be, outsourced to technology partners for whom those things are its core business. Panasonic or CATL is always going to be able to manufacture battery cells more cheaply than a single car maker given their scale economies.

What a new car company does need to do is selectively focus on smart investments into critical aspects of its business that can provide it with a unique selling proposition for its customers. Focus on chassis/platform design to ensure modularity (the ability to offer multiple models using the same basic architecture) while also focusing on driving dynamics. This doesn’t mean just designing a skateboard chassis and then considering ‘job done’, it means a comprehensive innovation plan to create the best packaged cars possible in every model-range category. Another thing that a new car company must focus on? Software. It’s clear that software will be the differentiator for car companies in the future, not just for connectivity and infotainment as most car users see it now, but rather developing the control systems that guide a car’s critical functions and its safe operation for drivers (and being able to constantly refine and improve those systems through data analysis and machine learning).

Importantly, I would not chase volumes, especially not in the misguided belief that only through high volumes of EVs can the world be “saved” (looking at you, Elon Musk). Or the even more misguided thought that building and selling in volume are a path to profitability through scale. Sales and profit do not have a causal relationship! If anything, mindless pursuit of sales often leads to diminishing profitability. Consumers will embrace innovative products when you can demonstrate its superiority to incumbent and legacy alternatives. Do your market research, find your market segment, and then build a focused plan to lead it. I think this is advice worth taking.

Joseph Lo is a serial entrepreneur, startup and growth strategy advisor, and angel investor.

10 Albums in 10 Days

Recently, I was asked by friends on social media to list the ten albums that have had the biggest impact on forming my musical tastes. While it seemed a simple task at first, I quickly realised that it’s a herculean task to curate all of my favourite music into just ten albums. There’s just too much good music. So I’m going to cheat and list eleven albums (plus two bonus tracks) that move me to this day.

1. L-O-V-E (1975), The Wynners

Hong Kong’s first pan-Asia superstar band. When this album first came out, I was too young to be buying music. But my mom said that whenever I heard the eponymous song being played – be it on the radio or wafting out from a store – I couldn’t help but dance. And it’s still that way.

2. Thriller (1982), Michael Jackson

Michael Jackson’s Thriller is the biggest-selling album of all time – I totally get why. It was a seminal album that confirmed MJ as the King of Pop. And it was my gateway drug into soul, R&B and dance moves that I couldn’t replicate without hurting myself badly.

3. Seven and the Ragged Tiger (1983), Duran Duran

For a Hong Kong-Chinese kid living in western Canada, Europe wasn’t just on the other side of the planet, it felt like it might as well have been the moon. But seeing Duran Duran on MuchMusic (Canada’s version of MTV) made euro-cool accessible. Cool guys, in exotic locales, with statuesque bottle blondes – that could be me! Plus it was yet another gateway drug that led me right into Pet Shop Boys, New Order, Eurythmics, Spandau Ballet, and the rest of the new wave that shaped my teenage tastes.

4. Like a Virgin (1984), Madonna

I actually think 1983’s Madonna is the better album. But….but, Like a Virgin, that album cover in particular, made my 11-year old weenie tingle. And that was something new.

5. The Joshua Tree (1987), U2

First time I realised music could have a conscience.

6. Enter the Wu-Tang (36 Chambers) (1993), Wu-Tang Clan

Ol’ Dirty Bastard live and uncut. RZA gave my life a soundtrack with this album – amazing energy that gets me pumped up like I’m the one heading to Shaolin Temple to kick some bald monk ass.

7. Thug Life: Volume 1 (1994), Tupac

Most people know Tupac for Death Row Records and the East Coast-West Coast rivalry that led to his getting shot dead at 25. But I think Tupac was at his best as the son of Black Panther Party activists who rhymed about issues in his community.

8. Baja Sessions (1996), Chris Isaak

Chris Isaak has an Elvis-like quality to his music that makes me think this is how Elvis should have sounded in the 60s were it not for all the fame, coke and Colonel Tom Parker’s weird influences. Baja Sessions is stripped back, acoustic, and so Mexicali – it just invokes summer barbecues and hanging around the pool with a cold beer and watermelon. God, I love summer.

9. Global Underground 014: John Digweed, Hong Kong (1999)

This album was compiled from the set played by John Digweed at a party in Kowloon Bay back in 1999. I happened to be at this party. It was pretty amazing.

10. 2001 (1999), Dr Dre

Summer of 2000, my brothers and I drove around California for kicks. It was one of those trips that you’ll remember vividly your whole life. This album was our soundtrack. Other mofo’s might have “Forgot About Dre” but we haven’t. He’s “Still D.R.E” to us.

11. The Fast and The Furious: Tokyo Drift Original Motion Picture Soundtrack (2006)

I am car crazy, so it makes sense that my musical tastes should overlap with my love for all things car. Tokyo Drift was the third movie in the Fast and Furious franchise and the last to have anything to do with cars (so it was also the last good FF movie, all the subsequent ones are ridiculous).

Bonus Track 1 – Eat It, single from “Weird Al” Yankovic in 3-D (1984), Weird Al Yankovic

This song, plus Mad Magazine and National Lampoon, informs my funny.

Bonus Track 2 – In Utero (1993), Nirvana

I don’t know how to categorize Nirvana, because Kurt Cobain was dead by the time I discovered them. But the more I listen, and the older I get, the more I identify with that existential angst.

Is Anything Worse than Sour Coffee?

Maybe just Luckin Coffee…

On February 1, 2020, the prominent hedge fund, Muddy Waters, published a report which it had received anonymously, alleging that China’s Luckin Coffee chain of coffee shops was publishing fraudulent financial results. The report alleges that Luckin Coffee is inflating its revenue numbers and fraudulently reducing its operating losses in order to accelerate reaching store-level profitability. The 89-page report goes on to argue that Luckin Coffee’s business model is not sustainable and will fail eventually. It states that Luckin Coffee’s senior management is aware of the intrinsic weakness of its business model, so they have already cashed out nearly half their shares through loan pledges.

As of February 13, 2020, when this report was written, the allegations have not been proven, and Luckin Coffee itself has strenuously denied any wrong-doing. But, already battered by the Wuhan corona virus epidemic, this incident has helped push Luckin Coffee’s share price from a historic high of USD$50.02 on January 17, 2020 to USD$31.35 on February 3, 2020, a 37% drop in its share price. More bad news for Luckin Coffee came on Feb 4 2020, when a prominent consumer rights law firm, Scott + Scott Attorneys, announced it had begun an investigation into whether Luckin Coffee had broken federal securities laws in the US, ahead of a possible class action lawsuit. Since then, multiple law firms in the US have announced the launch of similar actions.

Luckin Coffee had its Nasdaq debut on May 17, 2019. Since then, it has traded from a low of USD$15.32 on May 24 2019 to a high of USD$50.02 on Jan 17, 2020. It subsequently fell back to USD$32.49 by Jan 31 2020 (-35%).
*Source: Google Finance*

Luckin Coffee styles itself as China’s homegrown Starbucks. But where Starbucks bills itself the “third-place” between home and work, where people can relax, chat, and hold ad hoc casual meetings, while drinking coffee and eating light meals, Luckin Coffee focuses on distributing coffee and snacks (and lately, tea) as efficiently as possible, meaning that most of its sales are take-out and delivery oriented. This gives Luckin Coffee, hopefully, a more asset-light model where it doesn’t need to focus its capital on well-located and well-decorated high street stores. Instead, it installs much smaller stores and counters. On the Peking University campus, Luckin Coffee has a delivery counter located inside the Law School building, well-positioned to serve customers in the northeast corner of the campus where many of the professional schools are located.

Luckin Coffee’s Nasdaq IPO in May 2019 raised over USD$650 million, that it has used to expand its network of shops and to acquire customers through marketing and subsidies. It has subsequently raised more than that figure again, through a share placement and bond offering that raised USD$821 million in early January. As of March 31, 2019, Luckin Coffee had 2,370 stores across China. By the end of 2019, the number of Luckin Coffee locations had grown to over 4,500. That’s more than the 3.700 Starbucks stores in China, although the vast majority of Luckin Coffee’s locations are take-out and delivery counters rather than full-service sit-down restaurants.

*Key operating data for the first 9 months of 2019, compared year-on-year.*
*Source: Luckin Coffee investor relations*

The anonymous report released through Muddy Waters has two main charges against Luckin Coffee. First, the report alleges that the coffee chain has inflated key operating metrics, including the “number of items sold per store per day”, “items per order”, “net sales revenue”, and overstated the significance of sales in non-coffee products. This also includes claims that Luckin Coffee overstated advertising expenditures, and somehow “recycled” those expenses to artificially inflate net revenue and store-level profit. Secondly, on a more holistic level, the report argues that Luckin Coffee’s business model, particularly its use of growing customers by a type of “growthhacking” (the use of aggressive below-the-line marketing tactics, including heavily subsidising customer purchases), is fundamentally flawed and unsustainable.

To the first point, that Luckin Coffee’s numbers were somehow “cooked” and fraudulent, after going through their IPO listing memorandum and their latest quarterly results releases, I determined that of those operating metrics that the report highlights as fraudulent, only net sales revenue is publicly disclosed by Luckin Coffee. Instead, the report said it compiled its own findings, claiming that it tabulated its own numbers through detective work that involved 92 full-time and 1,418 part-time investigating staff. Those investigators selected 620 stores in major urban centres across China (about 13% of Luckin Coffee stores), making videos and in-store observations covering 981 store-days (on average 1.58 days per store). Each video was about 11.5 hours in length, covering store opening to closing. Through its video surveillance, the report alleges the “number of items (sold) per store per day was inflated by at least 69% in 2019 Q3 and 88% in 2019 Q4, supported by 11,260 hours of store traffic video”. The report’s authors also said they found evidence that “marked a continuous downward trend of items per order from 1.74 in 1Q2018 to 1.14 in 4Q2019”, through having acquired more than 25,000 receipts from 10,000 customers.

I find the report’s video surveillance and receipt collection extremely dubious as evidence of Luckin Coffee’s wrong-doing. While it’s not difficult to count foot traffic by installing a camera outside facing the entrance of a Luckin Coffee outlet, how much useful information could be gathered this way? It would be impossible to know what was inside the takeout bags being carried by customers and delivery people, which you would have to know in order to count how many items were being sold per store per day. And given that delivery people usually make stops to multiple customers on a single trip, even counting the number of times a delivery person arrived-and-left the store would undercount total customers. Both video surveillance and receipt collection are exceptionally vulnerable to statistical biases in the sample collection. Of the video surveillance, only 13% of stores were selected for video monitoring, and each for an average of just 1.58 days. Similarly, while the report references 25,000 receipts, it makes no mention of how, from who, and where these receipts were gathered. Because of that, I find the second point that the anonymous report makes, that Luckin Coffee’s founders and senior management know that its business model is fundamentally flawed and unsustainable, much more compelling.

Without doubt, the most contentious point of Luckin Coffee’s business plan is its customer acquisition strategy, and the question of whether it’s sustainable. I don’t believe it is, and in this point, I am in agreement with “anonymous”. To acquire customers as aggressively as it has, Luckin Coffee has had to give away a lot of free coffee. When I first came upon Luckin Coffee in 4Q18, the entire menu was 50% off. Free coffee when you first download the app. Free coffee upon each friend referral. One free coffee when you buy two. Five free when buying five. In the first quarter of 2019, for every new customer acquired, Luckin Coffee spent 16.9 yuan in “new customer acquisition” costs and 6.9 yuan in “free product promotion expenses”.

*New customer acquisition costs from 1Q2018 to 3Q2019.*
*Source: Luckin Coffee investor relations*

In recent months, Luckin Coffee has accelerated its spending on customer acquisition. In 3Q2019, Luckin Coffee said it gained 7.9 million new transacting customers. But to get those customers, it spent CNY55.2 per customer. That represents a nearly 3.3-fold increase in the amount that it spent per customer at the beginning of the year. In all, Luckin Coffee’s 3Q2019 results announcement disclosed that it had spent more than CNY436 million attracting new customers in 3Q2019, after having spent over CNY283 million attracting 5.9 million new transacting customers in 2Q2019. Again, according to its third-quarter earnings release, average monthly items sold for 1Q2019 was 16,275.8, which increased 2.7-fold to 44.244.6 in 3Q2019. Yet recall that it increased its customer acquisition subsidies by more than 330% over the same period. The company’s discount programs are actually decreasing in effectiveness, and going forward each sale may require even more subsidies. Not only is Luckin Coffee effectively paying people to drink its coffee, but it’s actually having to pay them more as time goes on. This is the opposite picture of what a sustainable, growing business should look like.

And more unsettling, Luckin Coffee offers little continuing data on customer loyalty, or how many new customers acquired in 2019 has become repeat customers. Instead, Luckin Coffee offers investors and analysts a figure it calls “transaction value per customer (based on listed price)”. It says in a very difficult-to-read graph in its 3Q2019 results announcement that this value is over CNY80 per transaction, although for some groups of customers, it can be as low as CNY10 per transaction. Starbucks and McCafe offer loyalty programs where customers can receive a free coffee after a certain number of consecutive purchases. As far as I can tell, the Luckin Coffee APP has no such function. Rather, I find that if I don’t order coffee after a certain amount of time, it tries to tempt me back by offering me heavily discounted coffee. This leads most observers of Luckin Coffee to suspect that customer loyalty and repeat custom is extremely low.

Shockingly for a publicly-traded company on a major US exchange, Luckin Coffee gets away with publishing no total revenue numbers, at all. It does not reveal total gross revenues, or total sales based on listed menu prices. Instead, it offers “total net revenue”, which is total gross revenues minus direct expenses. This is not a normal investor relations practice, as this could be an obfuscation on the part of the company’s management. Investors need to know a company’s ability to generate sales and only total gross revenues can give that. For example, let’s suppose a company generated 10 dollars in total net sales from a customer, but the company needed to give that customer a 10 dollar subsidy in order to achieve the sale. The net effect of such a transaction is zero. Which could very likely be the case here, as Luckin Coffee offers investors little hard evidence to believe otherwise.

Take a Bite of This!

I finally had a chance to try the infamous Impossible Burger meat analogue last week, while on a brief visit home to Hong Kong. I’ve been looking forward trying the Impossible Burger, especially its new and improved 2.0 formulation made of soy protein, for a few months now. To my surprise and delight, Triple O’s was offering the Impossible Burger in its Hong Kong restaurants. Incidentally, Triple O’s is a western Canadian fast food chain that I grew up with and love deeply. Then again, my partner says I express the same sentiments for McDonald’s and A&W Canada and countless other fast food brands.

Anyway, about the Impossible Burger. It’s not really a burger. I mean, it is a burger but it’s not made of real meat. Followers of this blog will have read my previous post about it. It’s a fake meat hamburger patty made of soy protein concentrate, coconut oil and other flavourings, including a genetically-engineered special sauce that makes the Impossible Burger taste more like red meat than any other fake beef before it. That special sauce is leghemoglobin, a molecule found in the roots of soy plants that is very similar to red blood cells. In Impossible’s case, though, the leghemoglobin is derived from industrially-grown yeast cultures that have been genetically-engineered to produce it.

The markets have been abuzz with Impossible Foods, the maker of the Impossible Burger all summer. The company started a small test run with Burger King in the US in April. And in a few short months, demand has skyrocketed. Burger King announced last week that it would roll out the Impossible Whopper, as it calls it, across all of its US locations. Actually, investors have gone crazy about meat analogue companies in general, as competitor Beyond Meats stock price had a spectacular nine-fold-plus run from its IPO in May to the end of July.

To be honest, I don’t really get the meat analogue thing. The Impossible Burger is a super highly-processed food, and is chock full of GMO ingredients. It’s actually probably bad for you, even though it contains no meat. Okay, it contains no meat, meaning it’s a bit better for the environment (no farting cows and such contributing to global warming). But I, like many Asians, don’t eat much meat anyways. The Chinese diet (at least home-cooking) tends to include a lot more vegetables than the average western diet. Sure, I love western fast food (show me a kid raised on Hollywood movies who doesn’t?), but even I can’t eat it every day.

I will admit, however, that the Impossible Burger surprised me. It was surprisingly meat-like. The patty has a nice charred-meat smell. When I broke off a piece, it felt like I was breaking off a piece of hamburger. If you look closely inside the broken-off bit, it’s not as granular as a high-end beef patty should look. Somehow, it has a slight plasticky look, like a burger with a lot of cheap filler. But if you’re not paying close attention, you’d give it a pass.

My first bite was the broken-off piece alone. I didn’t want the bun, veggies and sauce to confuse my palate. I wanted to taste the Impossible Burger. And you know what? I was taken aback. It does really taste somewhat like meat. Maybe 70%. It definitely tastes more like meat than those soy and wheat protein-based dishes of rubber served for hundreds of years in buddhist monasteries across Asia. The chew is still slightly rubbery. But it’s okay because once you add in the bun, veggies, and sauce, and take it all in a single mouthful, that 70% jumps up to 80%. If I were less particular about food, I would probably say, yeah, it’s the same as meat.

There was one thing odd about it though. The patty has a slight funky taste that I can’t place, kind of like tempeh or an earthy mushroom. It kind of lingers in the back of the mouth. I wonder if that’s the taste of Impossible’s much-ballyhooed engineered heme. Red blood cells contains iron, and is supposed to have a slight metallic taste in the mouth. Which is what Impossible says it is trying to replicate with its artificial heme. I didn’t really get that though. Just the earthy funk. Maybe more like what I imagine geosmin would taste like.

Oh, and did I mention, at HK$88 ($11.22), it’s about double the price of a regular Triple O’s burger? Next time I’ll just order the regular burger with cow.

Out of the Mouths of Babes

Silicon Valley in 2019 has been all about disrupting the meat market with analogues from companies like Beyond Meat and Impossible Foods. Investors have rightly been impressed by Beyond Meat’s spectacular IPO and Impossible Burger’s march into mainstream fast-food. Unlike prior tech waves which quickly spread across the Pacific, fake meat hasn’t made much of a splash in China, though.

Meat analogue is nothing new here in China; buddhist vegetarians have been working on their favourite recipes for hundreds of years already. Chinese consumers also tend not to eat as much ground meat and sausage as westerners, which the latest meat analogues are replacing. Real-tasting filets of meat analogue are still far away.

But I think Silicon Valley’s next wave of food industry disruption will spillover to China, and in a big way, over the next 24 months. What wave is this? The next big thing will be about disrupting the infant formula market, with start-ups bringing to market new human breastmilk analogues offering much more complete nutrition to developing babies than what’s ever been available on the market. The World Heath Organisation says infants under six months of age should be breastfed to ensure an optimal health outcome. Human breast milk is a rich, diverse and complex nutritional source, with studies showing that breastfed children develop healthier than children fed on current formula. Unlike fake meat, new human milk analogues will definitely have high appeal in China.

The market for infant formula is substantial globally, and even more so in China. In 2017, it was worth around $56 billion. By 2025, worldwide sales of infant formula could reach $98 billion, according to a report published earlier this year by Global Market Insights. China accounts for close to half of the world’s infant formula market by value, around $25 billion according to Euromonitor, even though China accounts for just 17% of the world’s population. So bottle feeding infants seems far more popular in China than in other parts of the world.

Maybe that’s not surprising, given how overworked Chinese urban women are. Who has time to breastfeed when they’re expected “to hold up half the sky” (as Chairman Mao once declared)? China Daily said earlier this year that, on average, less than 30% of mothers breastfeed children under 6 months in China. That figure is presumably even lower in urban areas with a majority of working mothers. It compares poorly with an average of 57.5% in the US, according to figures from the Centers for Disease Control and Prevention. It also lags globally, as the World Health Organisation says around 36% of infants under 6 months are breastfed.

Of course, even when mothers do breastfeed, it doesn’t ensure optimal nutrition for their children. The quality of each women’s milk depends on genetics, diet, health and lifestyle. But even so, studies show breastmilk from healthy mothers is best for babies. It protects against allergies, lowers risk of asthma, there’s less chance of upset stomach and diarrhoea (leading to better growth and development), boosts the immune system. Studies also suggest that breastfed infants score higher on IQ tests later in life, possibly because the long-chain fatty acids in human milk are thought to be brain boosters (these are a kind of omega-3 fatty acid, like that found in fish oil).

So besides omega-3, what’s in human milk that’s not found in formula? Two of the three most abundant components of human milk are lactose (a type of sugar that is digestible by humans) and fat (which is also digested and used by humans). However, the third largest ingredient is prebiotic sugars, called oligosaccharides, which are not digestible by humans. Instead, oligosaccharides feed the probiotic bacteria found in our digestive systems, and which are thought to be essential not only to the operation of our digestive system but also to our immune systems, cholesterol management, and general health. There are nearly 200 different types of oligosaccharides found in human milk, feeding different types of probiotic bacteria. In infants, the most common of probiotic bacteria are bifidobacterium species. It’s interesting that breastfed infants develop bifidobacterium colonies earlier than infants fed exclusively by formula.

It’s also interesting that of the oligosaccharides in most women’s milk, a single type, 2’-Fucosyllactose (2’-FL) accounts for roughly 30% of the total. But scientists from Utrecht University in the Netherlands outline in a very interesting paper their belief that the diversity of human milk oligosaccharides help them play a key role in providing benefits to infants. They believe each type of oligosaccharide has a different influence on an infant’s microbiome and immune system development, owing to their different biological functions and mechanisms. Unfortunately, of the roughly 200 different types of oligosaccharides in human milk, the structures of less than 10% have been modelled. Meaning that we don’t know how they work, we just know that they work.

Another problem is that these sugars are not only diverse but also structurally complex, and so extracting or synthesising them for use in infant formula is a challenge. Speaking with researchers, I don’t get a sense of consensus on the most efficient methods to obtain these sugars; extracting them from human milk for commercial use being ethically wrong and anyways insufficient to create the volumes needed. The best ways in the pipeline seem to be either chemically or enzymatically synthesising them using methods based on yeast fermentation, or by engineering microbes (such as algae) to produce them.

At the moment, only a handful of simple oligosaccharides have been produced on a commercial scale, while many others have been synthesised in smaller amounts. The first infant formula unicorn will be the one that finds a way to ramp up extraction and synthesis techniques and comes closest to replicating the full diversity and complexity of human milk.

Postscript: China’s infant formula market is ripe for change. Trust in domestic infant formula brands has still not recovered from the Sanlu melamine scandal a decade ago. Nielsen says less than half of infant formula sold in China is domestically-produced. Parents not only prefer foreign brands; they prefer to buy formula directly from Hong Kong, Macau or even farther afield, even as Beijing tightens regulations against this. A universe of grey market importers exist to service the demand. The situation is, in fact, embarrassing. A few months ago, three Chinese warships visiting Australia were reported by local media to have loaded up with crates of infant formula before leaving Sydney Harbour. As a result, Beijing said in June that it wants local formula producers to recapture the domestic market, setting a target of 60% (although it didn’t set a timeline to achieve this).

Smells Like Communist Spirit*

I spent last week at a national education retreat (国情教育) in the central city of Linzhou, Henan province. Popularly called “red tourism”, these retreats take Communist Party of China (CPC) members to locations around the country with historical significance to the development of the CPC. The idea is to bring the Party’s history alive for the rank-and-file, to rekindle their revolutionary and proletarian spirit (even if Chinese people tend, nowadays, to aspire to Mercedes-Benz cars and Hermes bags rather than class struggle).

Since the CPC began promoting red tourism in 2005, it has become big business. China Daily said in March that over 800 million red tourism trips were made in 2018. According to the Ministry of Culture and Tourism, the average amount spent on a single domestic trip is around CNY930 (about $135). So the red tourism market may be worth nearly CNY750 billion per year (about $110 billion). But before you get too excited by the potential investment opportunities, keep in mind that it’s a market essentially closed to the private sector. As far as I can tell, these study tours are almost entirely subsidised by public funds and mostly spent at state-owned enterprises or government-owned destinations. Locals in those generally poor inland locations where red tourism takes place do benefit from some trickle-down, but it’s a small drip to be sure.

Group photos at the canal. Pic by Joseph Lo

The usual agenda of these retreats include sightseeing visits to important revolutionary locales, followed by classroom sessions and group study. Linzhou wasn’t my first taste of red tourism. Last year I attended a retreat at Yan’an in Shaanxi province, the endpoint of the Long March and important for being where the CPC based itself for most of the Second World War (or the Chinese War of Resistance Against Japan). The theme of that earlier retreat was highlighting the CPC’s resistance credentials. It also included a visit to nearby Liangjiahe, a small farming village where CPC General Secretary Xi Jinping spent the Cultural Revolution.

So what’s at Linzhou? Situated at the crossroads of Hebei, Henan and Shanxi provinces, it’s a rugged mountainous region where the Zhang River cuts through the Taihang mountains. The closest city is Anyang, about two-hours away by car, the first capital city of China, during the Shang Dynasty (between 1,600 BC to 1,000 BC), and where archeologists discovered examples of the earliest known forms of the Chinese writing system in oracle bones. But for the CPC, the area’s importance stems from much more recent history.

Linzhou is the location of the Red Flag Canal (红旗渠, or hongqiqu), a massive waterworks project from the 1960’s that is held up by the CPC as a shining example of what the communist spirit can achieve even in the face of scarcity and immense challenge. Connect the dots to the present day economic challenges being brought about by Trump’s trade war, and you’ll have a sense of the message the CPC is pushing to its rank-and-file. Self-reliance! As Rob Schneider says, You can do it!

The masses celebrating the canal’s completion. Photo by Joseph Lo

The central plains of China have always had a problem with drought and accompanying starvation. Guangdong province is populated by ethnic Han-Chinese from the central plains largely because, over the centuries, hunger pushed us south in search of more fertile farmland. So when the CPC took control of China in 1949, for the cadres in charge of Henan, and in particular, Linzhou, water relief works were a priority, even if they lacked the requisite technical know-how, money, and materiel.

It took nearly a decade of back-breaking work to complete the Red Flag Canal in 1969. The project consists of a 71-km long main canal feeding an extensive 1,500-km irrigation network. There are 134 tunnels cut through 24-km of mountain, and 150 aqueducts running across 6.5-km of ravines and crevices. It’s not especially pretty if you compare it with any old Roman waterworks in Europe, but it’s impressive nonetheless considering the lack of technical knowledge of the young cadres in charge of the project. And knowing that the work was almost entirely done by volunteer-farmers using no more than hand tools and whatever they brought with them from their farms. They didn’t even have dynamite, resorting to home-made blackpowder to blast away the cliff faces.

China’s central plains gave rise to Han-Chinese civilisation but also to drought and hunger. Photo by Joseph Lo

While the CPC now upholds Red Flag Canal as the embodiment of collectivism, mass mobilisation, honest labour and national pride (and evidence that the Great Leap Forward wasn’t all bad), the truth is that there wasn’t much support for it in Beijing at the time. The central government agreed to contribute just 15% of the canal’s construction costs, half-expecting that the local authorities would be unable to come up with the remaining CNY58 million-plus (about $200 million in present-day dollars) as that was more than the total CNY52.7 million GDP of Henan province in 1960. What the central government didn’t know, however, and which led to conflicts and serious problems later on, was that the Henan provincial leadership had massively underreported their grain yields for the previous number of years, giving them a secret surplus that would help cover their share of the canal’s costs.

And remember also that, at the beginning of the Great Leap Forward, Chairman Mao was more interested in leading China to overtake Great Britain as a steel-producing nation. In 1958, he had disastrously ordered the creation of millions of backyard furnaces and the melting of all household iron objects, unaware that wasn’t the recipe to make steel. The result was a critical shortage of household tools and farming implements across the country. Even doorknobs and nails were melted down in the heedless enthusiasm.

The Red Flag Canal is cut through the middle of the Taihang Mountains (note blue line along the cliff face). Photo by Joseph Lo.

The steel-making drive and other poorly-thought out policies of the Great Leap Forward caused the worst famine ever in Chinese history, which the CPC now calls the Great Chinese Famine. Frank Dikotter, the Chair Professor of Humanities at the University of Hong Kong, in his book, “Mao’s Great Famine”, figures that more than 40 million people across the country lost their lives. According to the national census bureau, for Henan province, in 1958 at the start of the Great Leap Forward, there were 493,000 people. By 1960, the population had dropped 20% to just 390,000. A nonagenarian cadre who worked on the canal in his youth told me the Red Flag Canal workers lived on no more than 6 ounces of bread per day during this period; “work” was not actually possible. It’s also possible that the diversion of grain to pay for the Red Flag Canal badly exacerbated the famine in Henan, one of the hardest hit provinces.

It’s also interesting that, as I was on the bus going to the Red Flag Canal museum, I was listening to a podcast about the Apollo 11 moon mission, which also took place in July 1969. I know it’s pointless to make a comparison; rural China during the 1960’s was probably little more advanced than rural China in 1560. But it’s still an interesting contrast, and a starting point to think about how quickly rural China has changed, for better and worse, over the last few decades.

Made with a lot of blood, sweat and tears. Display at Red Flag Canal Museum. Photo by Joseph Lo.

Our retreat was based at the Hongqiqu Leadership Academy (红旗渠干部学院), a sprawling modern 28-acre facility with 55,000-sq meters of classroom and dormitory space for 600 students at a time. A second phase is currently being built that will add space for another 1,000 students. More students are housed at nearby hotels and bused in for classes and events. The three-story academy canteen was chock-a-block at meal-times, which had to be staggered to accommodate everyone.

You’re probably thinking this retreat was a silly way to spend a good chunk of my summer break. You could have been at the beach with Daisy, Benji and Georgia! Plus I’m not even a CPC member. The retreat was organised by the United Front Work Dept of Zhuhai in Guangdong province, a southern city next door to Macau from which my maternal grandmother’s family hails. They were kind enough to invite me along as I am active in their overseas-Chinese groups. I always try to go when asked because these events give me a unique insight into the CPC’s current salient issues and policies.

For instance, I can report that Mr Xi’s anti-corruption drive for cadres and CPC members has become incredibly strict. Normally the first evening is marked by an introductory banquet with mandatory baijiu (distilled spirits) toasts. Not this time. No banqueting, just three meals a day at the academy canteen. No wine and no carousing, either. In fact, they didn’t even want us in town (outside of the academy) after dark. A couple of us did sneak out for a few beers at a local pub, only to be caught and given a severe dressing down (including for our party secretary and group leader to have to write a self-criticism, something I thought had gone out of style with the Cultural Revolution).

*A note about the title before anyone gets offended by it. It’s in tribute to one of my favourite songs from Nirvana, possibly the greatest band in human history. Besides the Apollo 11 podcast, I had Kurt speaking to me in my earbuds as we drove through the plains of Central China.

Hongqiqu Leadership Academy main entrance. Photo by Joseph Lo.

Three meals a day, but nothing to drink. Photo by Joseph Lo.

“Cleave open Taihang Mountain!” – that’s seriously what it says. Photo by Joseph Lo

The entire planning was done by just 26 cadres, all under the age of 30. Display at Red Flag Canal Museum. Photo by Joseph Lo.

Deep inside Taihang Mountain. Photo by Joseph Lo.

One section of the Red Flag Canal accessible to visitors. Photo by Joseph Lo.

Locals catering to visitors. My group didn’t spend much time in local businesses, however. Photo by Joseph Lo.

Chinese Ink

A few days ago, we noticed something very funny on our favourite show this summer, a reality tv production for Chinese indie rock bands called “Summer of Bands” (乐队的夏天). The bassist for one of the performing bands, Jiang Wei from Chengdu-based Christian rock band Mr Sea Turtle, was swathed in skin-coloured bandages like a mummy – on his earlobes, around his neck up to his chin, and on parts of his arms. Obviously, he was desperately trying to cover up his body-art and piercings. This may seem unfathomable. Don’t all indie rockers have tattoos? Ah-ha. But you see, since early 2018 tattoos have been banned from appearing on television in China – terrestrial, satellite or streaming.

This ban on body-art stems from the unexpected mainstream success of a reality tv show focused on hip hop and urban culture called “Rap of China” in late-2017. The show veritably body-slammed hip hop, rap and urban culture into mainstream consciousness. Tattoos, piercings, heavy gold chains, angry lyrics, to a heavy bass beat. A horrified government regulator – the State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China (SAPPRFT) – quickly issued stringent guides against such morally corrupt “art”. SAPPRFT’s guidelines have even led to some rappers disappearing from music streaming sites over the past half year. And recently, it seems these guidelines are getting increasingly strict in their implementation.

Summer of Bands, screenshot from iQiYi streaming app

Anyways, I’m writing on the tattoo ban because it’s liable to wreck my holiday plans next month. The Ultimate Fighting Championship’s Shenzhen show scheduled for the end of August, UFC Fight Night 157, which I’ve been looking forward to watching in person, has been thrown into doubt because of this body-art ban. The main fight is to be a title defence by the reigning women’s straw-weight champion, Jessica Andrade, against undefeated up-and-coming Chinese fighter, Zhang Weili. I don’t believe Ms Zhang is tattooed, but the reigning champion certainly is and heavily so.

Indeed, un-inked UFC fighters are probably few and far between. Another Chinese mixed martial artist I was hoping to see fight, the “Kungfu Monkey” Song Yadong, is heavily inked on his left leg. Mr Song presents a bigger problem for the UFC, as he has the championship potential to be the promotion’s most lucrative face in China. Not being able to promote him to Chinese MMA fans could be a big setback for both Mr Song and the development of MMA and UFC in China.

Song Yadong, the Kungfu Monkey. Pic from UFC website

Sure, Chinese culture has never embraced body-art. The Han Chinese, the majority racial group in China, sitting at the top of the social ladder, certainly rarely inked. Body-art has always been for ethnic minorities (those, ahem, “southern savages” (南蛮) running around the hills in the southwest of the country). Traditionally, those few Han Chinese who did ink were bandits, thieves and gangsters. Tattooing was for soldiers, who cultured people considered just only one small step removed from the aforementioned bandits, thieves and gangsters anyways.

In Han dynasty China, penal tattooing was one of the five capital punishments. The other four were cutting off the nose, cutting off the foot, castration and execution. There was a list of five hundred crimes that could be punishable by penal tattooing. And if you were to be sent into exile you would also be tattooed on the face, so people would always recognise you as a criminal. I guess in Han dynasty China, they weren’t big on rehabilitation. The classic Chinese novel, Outlaws of the Marsh, is probably the best embodiment all of these prejudices.

But certainly those taboos are hundreds of years old. We don’t tattoo criminals anymore. Nowadays, discrete body-art has become personal statements for young-ish urbanites. Small hipster tattoo parlours have sprung up all over China in recent years, especially in the big cities. Peek inside and, rather than a criminal or a gangster, you’re more likely to see a young female professional getting a small butterfly or a flower tattooed on her calf or something. But I guess long-held prejudices are tough to shake, even in China.

Friends who have gone swimming with me will know that I carry my political beliefs in red ink just above my heart: 天下为公 (“The World Under Heaven Is For All”). It’s a phrase out of Confucius’s Book of Rites, denoting the ethos for a fair society, and something I learned of from Dr Sun Yat-sen’s writings. I don’t consider myself Confucian, though. I’m subverting the sage for my more libertarian beliefs. Whatever its meaning, needless to say, my mom was probably just as horrified as SAPPRFT when she saw it for the first time.