2019.08.31 Liu Ming and Fang Peiyan Views:
In the interview, Zhang Wei criticized the fraudulent innovation of Luckin Coffee and pointed out its incompetence in operational abilities.
CoStone Capital Zhang Wei: Innovation in Disguise Would Succeed When Pigs Fly
The Internet players, who rely on innovative business models, are controversial. Their supporters believed in their business models and potential and are willing to give high valuation. Those who against it called it a publicity stunt and the bubble would blast one day. However, more people are perplexed about this field.
Zhang Wei, chairman of CoStone Capital, hit the nail on the head in terms of how to judge the value of companies of this sort. “Many so-called ‘Internet Plus’ companies are indeed traditional enterprises in disguise of innovative business models. It needs time-honored and outstanding operational management to succeed rather than burning through cash. Their potential only exists in imagination. To turn the imagination into reality, it depends on the synergy between the better operational management and further expansion.” Zhang Wei explained.
In terms of Luckin Coffee (LKNCY.NASDAQ), which had been burning through cash, Zhang Wei believed that it was only a traditional beverage company in essence. If it wanted to be successful, it had to show what it was capable of in running a café. He expected to see Luckin Coffee prove itself one day and by the time its true value would reveal.
“You will find it ridiculous to build a business empire like Haidilao (06862.HK) only with money. It is the same with Luckin Coffee.”
“When you see through its disguise, you will find that Luckin Coffee is only a traditional coffee shop. Whether it can be successful depends on its management and marketing. It can’t be done by burning through cash. It takes time.” Zhang Wei added, “Only when Luckin Coffee makes the world believe it can run a real café, its valuation can be true.”
Luckin is a traditional coffee shop rather than a brand-new concept. It needs more than others the abilities to manage outlets, supply chains, product development and quality control, cost control, corporate culture and on-job trainings. Its operational ability sustains its business model. The subsidies cannot last forever. It all comes down to the profitability of coffee shops.
Zhang Wei suggested that a costly business model could hardly succeed, and it counted on the traditional abilities. That’s why Zhang Wei did not support the NEVs. NEVs were depending on the traditional automobile manufacturing skills.
Zhang Wei’s logic was manifested clearly in Haidilao. Haidilao, one of the biggest hot-pot catering businesses in China, had a revenue of nearly ¥17 billion ($2.632 billion) last year. It is estimated that its revenue will hit ¥20 billion ($3.096 billion) this year. People will think it is ridiculous that someone wants to build another “Haidilao” with money.
“We raise ¥1 billion ($154.844 million) to entice a raft of employees from Haidilao, and then take advantage of the Internet to build another ‘Haidilao’. Do you think this one will succeed? Absolutely no. Because business models cannot be simply borrowed from others. The operational abilities behind the models have endured numerous tests in a long time.” he explained.
However, why did people pay billions to copy Starbucks? Zhang Wei thought it all came down to the imaginative potential that the new concept brought. “Coffee is more of a fashion with many new concepts and add-ons. For instance, it can use better coffee beans and smaller shops. It can offer take-outs when no other competitors can. Coffee business is still a potential growth area in China. A business is supposed to make use of economies of scale, once it obtains large-scale production. However, a restaurant can hardly reap the benefits of economies of scale. Haidilao and Starbucks opened the 100th branches after 20 years. The operational abilities cannot be accomplished overnight. A traditional business cannot succeed by burning through cash.
Luckin Coffee went public on May 17 in NASDAQ. On August 14, it released the first financial report to the investors after its IPO. According to the report, Luckin Coffee gained $140.76 million revenue for the second quarter, increased by 648.2% year-on-year, compared to ￥18.81 million last year. Luckin made a net loss of ￥105.49 million, up by 105% year-on-year.
Those who supported it saw hope in its 7X quarterly revenue, and those who didn’t only held on to the increasing loss. Luckin Coffee fell on its first day of trading. Now, its share price has eased back from the record high points three months after its IPO. It is now in the middle of the game of capitals.
Zhang Wei preferred core-tech enterprises. Core-tech companies have solid foundation built by world-class scientists, which is hard to be copied. “Core-tech companies take more time to grow and research.” Zhang Wei thought highly of HUAWEI, “HUAWEI was founded in 1987, when Tencent and Alibaba haven’t show up. It takes a long time and huge investment to gain growth. It is a lot harder to succeed than those business model-based and Internet-based enterprises.”
Above: Excerpt of the special interview with Zhang Wei from China Fund. In the interview, Zhang Wei criticized the fraudulent innovation of Luckin Coffee and pointed out its incompetence in operational abilities. Please refer to the link below to view the interview in full: http://stonevc.com/news_view.aspx?TypeId=5&Id=791&Fid=t2:5:2
Rewritten by: Luo Xinying, Edited by: Du Zhixin, Wei Yiyi
The year 2019 marks the fortieth anniversary of China’s Reform &Opening-Up, once again, we meet at the turning point of history. What’s the next step for the game, is there any clear guidance? The answer is affirmative.
Our country is enjoying a good momentum of development, which does not come from the Washington Consensus nor the Beijing Consensus. China’s experience has proved that both the visible hand and the invisible hand are crucial: the visible hand, stands for the government-led reform, and would yield benefits for reform and opening up; the invisible hand, stands for the Marginal Power represented by the private sector, and would improve economic efficiency and tax collection, create jobs and employment opportunities.
Provided that we want to protect and expand the benefits form reform, three simple but mandatory agreements are to be made and followed: No.1 Private ownership must be recognized, protected and treated equally with public ownership constitutionally, both ownerships are scared and inviolable;No.2 Make further clarification of the principal position of market economy, “deepen economic system reform by centering on the decisive role of the market in allocating resources”, as President Xi addressed in the third Plenary Session of the 18th CPC Central Committee;No.3 Implement the guiding principles of “comprehensively promoting law-based governance” of the fourth plenum. The rule of law is essential for economic growth, irreplaceable to protect private ownership, and necessary to encourage innovation and entrepreneurship.
Above are three rules for us to avoid falling into the Middle-income Trap. Assuming that we are breaking systematic barriers to private enterprises’ participation in market economy, and boosting innovation and entrepreneurship of our society, then we are heading towards a promoting direction. We are marching in the path of light, regardless of the ups and downs of Sino-US relationship, the drop in GDP growth rate, or the monetary policy.
These principals also apply on knowing how better to run a business: don’t be hedged by rules and regulations at the beginning, pay more attention to your survival, and you’ll learn more when you start your second business.
For many years, Huawei has been the only Chinese company on the list of the Top 50 R&D Spenders. Regardless of the economy and its income, what Huawei has been doing is investing in its future, dedicated to R&D, continuously and resolutely. This provisional work underscores Huawei’s accomplishments, making Huawei anindustry leader.
So, there are standard answers on how to run a company,which could be summarized as concentration and professional dedication, continuous investment on innovation and trying harder in R&D. Entrepreneurship is also important, every single company needs entrepreneurs to push aside all obstacles and difficulties, to implement strategies and ideas. We, as investors, are destined to look for such outstanding entrepreneurs and their companies, invest in them and partner with them.
At this key point of history, a country, a company, or asingle individual, will all need to find the right path. Four decades after the Reform and Opening-up, it’s time to learn from our experience and stop “wadding across