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Venture Capital in China with Gary Rieschel · China Considered

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[MUSIC]
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>> Elizabeth Economy: Welcome to China Considered, a podcast that brings fresh
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insight and informed discussion to one of the most consequential issues of our time,
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how China's changing and changing the world.
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I'm Liz Economy, Hargrove Senior Fellow, Co-Director of the program on the US China
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and the World at the Hoover Institution at Stanford University.
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Today, I have with me, Gary Rieschel,
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who's founding managing partner of Qiming Venture Partners, a venture capital firm
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that he started with his partner Duane Huang in Shanghai almost two decades ago.
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Gary is one of the most knowledgeable and successful VC investors in China, and
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I'm delighted to have him with us today.
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Welcome, Gary.
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>> Gary Rieschel: Yeah, good morning, Elizabeth.
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Thank you.
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It's a pleasure to be here.
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>> Elizabeth Economy: So, before we dive into all of the hot topics of the day,
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like whether China's already surpassed the United States as
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the world's center of innovation.
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Or how new US Investment restrictions might affect venture capital opportunities
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in China, let's get a little bit of historical background.
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You started teaming in 2006,
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well before many big Western VC firms even thought about investing in China.
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What made you think that China was the place to be?
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>> Gary Rieschel: So when I had been at SoftBank, running SoftBank's investment
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group from 95 to 2004, during that time, I set up two funds in China.
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So we helped Chauncey Hsieh set up SoftBank China Venture Capital in 1999.
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And then in 2001,
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as part of a buyout of a joint venture that Cisco had with SoftBank,
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we set up a fund called the SoftBank Asia Infrastructure Fund, or SAFE.
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And those two gave me SoftBank China gave me a very early look.
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SAFE gave me a look at the consumer market because one of its most
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successful investments was a company called Shandot,
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which became a very large game gaming company there.
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And then I also helped set up a fund with a gentleman named Feng Bo and
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his partner, Chris Wadsworth, and that was in 2004.
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And Feng Bo wound up marrying the granddaughter of Deng Xiaoping, so
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that gives you some indication.
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And his brother, Feng Tao, set up new margins.
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So when I went to China at the end of 04,
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I actually had insights into three operating venture capital funds pretty
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much before anyone in the west had too much experience or exposure to that.
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>> Elizabeth Economy: So did you feel well prepared sort of for
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the challenges that you would face, or did certain things surprise you?
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What were the kinds of challenges that you encountered?
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Again, being a pretty early investor.
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>> Gary Rieschel: So some of the challenges that were immediately obvious
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was there was no infrastructure at the time to Support venture capital in
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Silicon Valley.
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You had 40 years of accounting rules and
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regulations, you had all this legal experience,
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you had deep knowledge on generations of entrepreneurs who would give you
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reference support as you were looking at investments with other entrepreneurs.
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So you could cross reference quite a bit.
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There was none of that in China, so it was really greenfield, the accounting.
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Even by Chinese standards, it was ambiguous.
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China celebrates ambiguity in many ways.
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But even by Chinese standards, the accounting systems, the legal systems were
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very ambiguous, and you had to be very careful on references because when you
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called someone on a reference, the answer was always, they're a nice guy.
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And it was something where you really had to form a network of people that would
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tell you the truth about people.
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And that partly I had an advantage with that because people trusted me because of
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what I had already done.
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And so that was one of the major issues that came up.
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The VIE structure in terms of what you were actually investing in.
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>> Elizabeth Economy: VIE means.
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>> Gary Rieschel: The variable interest entity structure,
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in which it was illegal for a foreign firm to actually have an Internet license,
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they treated it like a media company.
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So it was illegal for a foreign firm to actually own a license that was
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promoting content directly to Chinese consumers.
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So you had to set up an entity where a partnership or
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a partner in China held that license and the offshore entity had
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a subsequent agreement with them to be able to use the license.
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And so, that wound up being, you know, that's how CNIP went public.
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Many, many of the Internet companies in China were under that and
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it wasn't prohibited, but it wasn't expressly permitted.
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So you were investing in a legal entity you weren't sure of the long
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term viability of, so that part was a little bit interesting.
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>> Elizabeth Economy: Can I just ask who was your Chinese partner?
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Who?
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>> Gary Rieschel: So Qiming didn't need that, but
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any company we invested in that invested dollars.
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>> Elizabeth Economy: Okay.
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>> Gary Rieschel: Had to have that, had to have that.
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So Qiming didn't need to have anything like that.
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Dwayne, as you mentioned earlier, was my partner.
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But so, but the companies we invested in that were doing anything on consumer
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Internet needed to have some kind of relationship like that.
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>> Elizabeth Economy: Okay, I see.
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>> Gary Rieschel: And then, there were other things, the government regulations.
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There were four different entities that were trying to govern VC at the time and
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they had conflicting guidelines.
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So you got to pick, you kind of had to pick which ministry you were going to be
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in violation of today when you were setting up the funds.
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So it was like that prehistoric soup of primordial ooze that
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you're basically figuring out how it's gonna coalesce.
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>> Elizabeth Economy: So you must have figured it out pretty well because I know
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you had some pretty high profile successes.
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You want to talk a little bit about those?
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>> Gary Rieschel: Well, so the firm, the key thing was actually finding a partner.
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I always find it entertaining when people say you can't find good partners in China
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and I think that's just ridiculous.
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That's like saying, well,
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somehow it's a different species of human being that you can't partner with.
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And I just totally reject that, I'd known Dwayne for a number of years.
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I interviewed several different VCs,
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several different people when I was in China to see who would be a good fit.
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And Duane was clearly, you know, the best fit and
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turned out 20 years later to have been a very, very good decision.
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So that was really the key thing that one had to do.
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The other things we did was we insisted, I should say I because at the time I
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was quite a bit more senior than Dwayne in the overall industry and
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I insisted that everyone's compensation be the same.
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So if you became a managing partner, everyone got paid the same as me,
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both cash and carry.
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Extremely unusual for China.
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Still unusual for China.
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The other thing we did was we focused on sectors.
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So instead of having everyone try to do everything, we anticipated that having
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deeper knowledge as China, as the investments became more technical over
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time having more knowledge in technology areas would become more important.
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So we had a consumer Internet sector, a core technology sector.
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And then quite unusual for the time time we invested in healthcare and
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set up what became China's largest healthcare investment operation.
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So those were things that we spent a great deal of time on, you know,
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at the beginning and I will say that the maybe one of the proudest pieces
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of the Qiming story to me is how the culture has actually lasted 20 years and
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is really celebrated by the senior people in the firm.
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That, that actually has been phenomenal.
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The deals.
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The deals are the deals.
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We had one of the real foundational Companies for
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Fun 1 was a company called TigerMed which was the first clinical research
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company in China to offer the same level of standard and analysis for
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conducting clinical trials on new pharmaceutical products.
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Became it was the first company that we listed on a Chinese exchange.
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The really funny element of that.
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Was it?
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I was the board member.
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So the guy who doesn't speak Chinese and who doesn't read Chinese actually
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has to take the Chinese Security Regulatory Commission test for
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a board member to list this on the Shenzhen Stock Exchange.
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It was a pretty hysterical process.
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And I would say that.
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>> Elizabeth Economy: Wait, I wanna know what you scored.
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>> Gary Rieschel: Perfect score, of course.
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>> Elizabeth Economy: Okay.
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>> Gary Rieschel: And let's just say there I had some advising on the side, but
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what they really.
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And it's not a bad.
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It wouldn't be a bad system for the us.
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This goes back to a theme of we can learn things from the Chinese and
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how they do things.
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They came and they interviewed me for two hours on Tigermed's business.
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We went through what the gross margins were,
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we went through what the risk factors were.
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We went through all these different things in order to be a director of a public
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company in China.
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I would submit to you we might not be badly, we might be a little better off if
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people in the US had to go through those kind of tests.
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They had some clue of what the business was they were sitting on the board of.
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So fund one had Tigermed and that returned the entire fund.
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And after several years, fund two wound up being quite special.
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It had two huge hits.
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One was Gan and Lee, which was a diabetes drug company, which had a funny story.
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Our partner who was running the healthcare practice couldn't get a meeting with
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the founder.
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And it turns out that one of our best friends at school, there's our sons,
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were together in class and over a weekend conversation,
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the father says, well, I'm best friends with Dr Gan.
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Do you want to get a meeting?
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So we flew to Beijing and we set up a meeting.
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And so that returned a billion dollars to Qiming and then Xiaomi.
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And Xiaomi, of course has become one of China's iconic tech companies.
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And the founder, Lei Jun, did a spectacular job.
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Duane did a spectacular in advising the company over many years.
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And so each fund has had those kind of successes.
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So we're raising our ninth dollar based fund now.
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We can talk about dollar fundraising now versus RMB later.
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But the team has done a spectacular job.
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How many people do you employ today just to give a sense of how big you are?
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100 people.
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And we have, including a guidance fund we manage for the Chinese government.
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The team in China manages for the Chinese government.
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It's about $12 billion.
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>> Elizabeth Economy: I'm just curious, you know, when you first started out and
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you were hiring people, clearly there couldn't have been that many people who
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had experience doing this kind of work.
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What did you look for in your early hires?
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I mean, aside from Dwayne, your partner, what were the sort of the qualities that
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you looked for in the younger Chinese that you hired?
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>> Gary Rieschel: That's a great question.
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And I think that VCs get quite full of themselves.
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I always find it quite humorous when a VC says, well, we did this and we did that.
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The reality is no, you didn't do that, the CEO did that or the team did that.
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And you need to be, you need to keep the perspective that you're a service
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industry to support entrepreneurs.
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That's what we recruited for.
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So you recruited for people that had the mentality that they understood that they
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were there when the CEO made a phone call, needed help, that they had some expertise,
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some technology background, some operating background, but
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they could really take that call and add value and support the CEO.
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That was the primary requirement.
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I've always recruited, for the last 40 years, I recruit for two things.
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One you can know and one you have to experience.
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The one you know, you can know.
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If someone's curious, that will come out in an interview.
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You cannot know someone is generous until you've worked with them.
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And for me, generous was equally important in some ways,
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maybe more important than being curious because there is a way of thinking,
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of being able to inconvenience yourself that if you're in a service
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industry you have to be willing to do that.
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And so those are really the key attributes we look for.
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They had to be smart.
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Lots of smart people in China and good investors.
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Venture investing is hard.
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We had one partner who was what I would call a very,
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very good investor but he could not do really early stage deals.
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And so we parted company.
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I mean, if you pass on ByteDance twice without showing it to you,
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without showing it to your partners.
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I'm sorry, I'm sorry.
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There's a cost associated with that.
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>> Elizabeth Economy: Yes.
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So just it's what you're saying is it takes a certain skill set to recognize
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the potential at an early stage that not everybody has.
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>> Gary Rieschel: I think that's right.
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I think that's right.
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Especially if you're doing a team oriented approach,
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which means you're not just going to have one person making all the decisions.
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And again, one of the things I was very careful about with Duane was it
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made no sense to have Qiming revolve around an older white
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guy who at some point was going to leave China.
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The dream was Qiming was going to last at least 30 years.
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We're 2/3 of the way there.
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And so I think the idea that we really always organize Qiming around what
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the next generation is gonna look like, that's really held us in good stead.
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>> Elizabeth Economy: Yeah, and obviously it's paid off well.
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So if you take a step back and you look at the overall landscape of Chinese venture
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capital, you know, what do you think of as sort of the landmark moments in
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the evolution of the space, you know, since you started working there,
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up until now, either positive or negative, were there moments when you
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saw just like big inflection point in how the industry was developing?
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>> Gary Rieschel: I think that certainly the 2005 timeframe,
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there were quite a few groups that started to talk about it started to come together.
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There was a, there was a Silicon Valley bank trip in 2003, 2004,
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I think that brought over a bunch of the senior VCs and I remember having dinner.
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We're sitting on the Bund and you're looking out over Pudong and
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it's like, yeah, maybe there's some opportunity here.
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And so you could feel the energy, you could just feel the, the,
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the vibe if you will.
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And so that,
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that put China on a lot of people's radar screen as an investment opportunity.
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I was the only senior VC to ever really move to China.
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Some people would spend a couple.
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No one else from Silicon Valley ever moved to China and stayed there for
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any extended period of time.
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However, 2005 also had the formation of Sequoia China.
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And I have to give full credit, Neil Shen without question has created
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the most successful investment platform in China.
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They deserve all the credit and he deserves the credit for that.
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You also had Kathy Hsu start Capital Today.
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You had Deng Fung start Northern Light.
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And I was involved in all of those different discussions in one way or
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the other.
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GGV Ji Xun Fu and Jenny Lee came together.
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So then, Hans Tung came in later to Qiming.
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That was kind of the, the formative JP con,
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that was kind of the formative 2005, 2006.
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So I would say the formation of those firms,
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the willingness of the foreign firms to hire local people and
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not have them run from Silicon Valley, you could look at that as a formative
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decision point in terms of how firms were thinking about being in China.
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I think if you look at healthcare, the success of Tigermed fundamentally
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changed China's healthcare industry cuz foreign pharmaceutical firms coming
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to China never had a partner like a quintiles in the US that could conduct.
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Trials at a global level, global quality and analytical level.
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So before we invested in TigerMed in 2007,
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2008, 95% of TigerMed's trials were for
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generic pharmaceuticals within the Chinese market.
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Within five years, 95% of his trials were for
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novel pharmaceutical products into the Chinese market.
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So just the entire business flip.
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So creating that capability was definitely there.
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I would say as you get into this 2008, 9 and 10 time frame.
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E-commerce, when Alibaba did two things that fundamentally changed
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the face of E-commerce, basically globally.
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Number one, when they went after ebay with Taobao,
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the launch program, spectacularly successful.
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SoftBank was heavily involved in supporting them in that.
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Because the market they were selling into,
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China is a low trust society.
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The institutions haven't established a great deal of trust with
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the Chinese people.
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So with E Commerce, you're asking someone to look at a product that
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they can't touch, buy it, pay money to someone they don't know, and
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then try to figure out how to return it if they don't like it.
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So what Alibaba did is in the early days they went to the courier services,
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they were having trouble.
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They were having a lot of complaints by customers.
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Not timely delivery, very awkward to return things.
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They told the couriers, you will pick it up within these windows or
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you don't work for us.
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You will deliver it within these windows or you don't work for us.
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You will wait for the customer to pay, and try it, and approve it, and
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take it back if they don't like it fundamentally changed.
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I mean, when a company establishes trust in a society,
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that company usually winds up being very successful.
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Second thing they did Alipay.
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And when you look at the genius behind Alipay and
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10Pay later with 10cent, 97% of all banking transactions
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in China before that were done through the banks, UnionPay, etc.
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Ten years later, 93% were done without the banks of electronic commerce transactions.
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So that was a big, big moment where you establish trust,
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you establish convenience.
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And then at the same time it also to me is the example I use with US government
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officials.
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Do you think the Chinese government told Alibaba to do that?
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Do you think this beautiful central planned economy,
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this was no, they were gutting the banks.
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So this was something that.
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It's a perfect example of the entrepreneurial driven success that
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China's had in its economy.
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Not a centrally planned economy in terms of bad things.
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One that doesn't get enough attention.
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2015, 16, China had a fairly significant market collapse.
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And Xi Jinping, the champions team came in, they went,
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were buying stock, and they tried to forestall the collapse.
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It didn't work and it kept getting worse.
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And, and I've been told by people that have met Xi numerous times that that
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really created a problem for him that there was a market, there was something
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inside China that he didn't control that could have material impact on the,
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on the, on this, on the harmony in the society, happiness of the people,
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pick whatever term you want.
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And he flipped.
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And that dirt after that time, the idea that he could allow market
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mechanisms to really make a lot of the decisions for him, it also,
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the VCs missed it, Qingming missed, everyone missed it.
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When CSRC started to become far more regulated,
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they had been opening the stock market up, pursuing a US listing orientation,
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and then it became CSRC approving the listings between 2018 and
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2022, 23, liquidity dried up.
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And so we have a problem in China now.
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The geopolitics are one thing.
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We have a problem in that liquidity has generally been very, very poor.
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So the foreign money that's gone into China is stuck.
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The R&B money that went in is stuck, so you have a dramatic constipation
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problem on the back end of getting these companies into the public market.
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And that's the part that when the regulators become that involved in
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the public markets, if you're a stock broker,
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if you're buying stocks, how do you trust that that's a real market.
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And China has yet
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to really establish trust in its entire capital market structure.
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Sorry, I went on for a while.
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>> Elizabeth Economy: No, that's great.
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I mean, and it, it brings up another question that I had, which is, you know,
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Xi Jinping has placed a lot of importance on China's rise as a technology power.
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He's invested, you know,
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had the central government invest hundreds of billions of dollars.
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But you're pointing out that in technology innovation and
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that's advanced manufacturing.
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But you're suggesting that the regulatory structure that the government has put in
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place is, is actually really constraining the opportunities at this point for
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more, you know, venture money to go in, probably private equity money to go in.
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Certainly they must realize that they have a problem.
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And you know,
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Xi Jinping has been on this big campaign recently talking to all these, you know,
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head CEOs of companies, saying we're open for business, we want your business.
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Does that just not apply to the venture world or
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is it simply that they're open for business?
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But they're not planning to change any regulations or
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anything that's actually going to make things open up.
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>> Gary Rieschel: Well, we can go back and look 30 years ago when they had the 863
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program that was targeted at the automobile industry and avionics.
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And 20 years later, was anyone buying,
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anyone outside of China buying a Chinese internal combustion engine car?
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No.
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And so the government led.
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And then you look at the hundreds of billions of dollars blown up in their
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semiconductor initiative with not nearly as much to show for
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it as they would expect.
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So when the government picks, when the Chinese government or
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any government has tried to pick sectors to develop,
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it's almost irresistible for them to not also pick companies.
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And the two things that China made a mistake on was they were picking state
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owned enterprises and JV partners with U.S.
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automotive makers, European automotive makers.
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And those weren't terribly innovative organizations.
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And when people talk about IP step misappropriation, theft,
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et cetera, a lot of it really did come from that time during the, during the 90s.
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And then you look at the, the semiconductor, the amount of graft and
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corruption that they uncovered with people in those massive funds they were putting
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into semiconductors, that was a, you know, that's a similar problem.
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Biotech.
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They actually, if you look at biotech, it evolved in China because foreign firms set
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up labs in China, sent thousands of extremely well trained engineers and
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scientists back over and five years later they were doing
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what the Chinese are very good at and they said, let's start our own company.
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And you wind up having all these spin outs.
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And that created the innovation engine in the biotech world.
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So it's not that the government policies, the direction at the beginning
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saying go innovate, they tried to use the state owned enterprises.
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That's a problem.
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The state owned enterprises are not terribly innovative,
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certainly not in the consumer electronics, automotive the new evolving tech areas.
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AI, that is where the innovation is.
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So I, when Xi Jinping held the meeting recently with the 30, 30,
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31 tech leaders, I.
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I doubt very much whether six months ago he was thinking
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that was a great thing to do.
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I think he was thinking we really,
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really need these state owned enterprises to step up.
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And after 10 years and hundreds of billions of dollars, he had bupkis,
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nothing to show for it from the state owned enterprises.
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And so if you didn't figure out how to bring the private enterprises into
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the fold, and so now he says, you're the future of China,
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you're who we have to cooperate with.
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Again, not his first choice.
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The other thing that came out of that, the most important thing that came out of that
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meeting was something that was not really covered that well in the US press.
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Two days later, sasac,
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which is the organization that manages all the state run assets, as you know well,
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issued a directive, not a suggestion, a directive to every state owned
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enterprise that they were to adapt AI based technologies as rapidly as possible.
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So they basically, because there's been no enterprise software market per se in
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China, you know, if you look at the 50 largest companies,
25:04
enterprise software companies in the world, maybe two are Chinese in terms of
25:08
true software company Tencent, you include Tencent, but it's really a gaming company.
25:13
So same thing in the large pharmaceutical companies.
25:15
So the fact that the state owned asset bureau said you will adopt these
25:19
technologies and those technologies are going to come from private companies,
25:22
they're not going to develop them themselves.
25:25
That's a pretty power.
25:27
Because what it does, it creates a new platform to leapfrog the last 30 years of
25:32
enterprise software development and put it on a new AI based platform.
25:36
They now have initiatives for education.
25:41
Every kid, starting at a grade three, I think it is,
25:45
is going to be learned to use AI tools.
25:48
Whereas, the US government is sitting here with the US education system.
25:51
The unions are saying, well no,
25:53
we don't want the kids to use AI because they cheat, okay?
25:57
But there are a lot of tools for the teachers.
25:58
We're not, and my son teaches physics at high school,
26:01
they're not letting him even use the teaching tools.
26:04
So again, when the government backfills, when there's something that's obvious they
26:08
have to do and then they backfill, they're pushing from behind, they're not leading
26:12
it, they're not directing it, but they're pushing from behind.
26:16
They can be very powerful.
26:18
>> Elizabeth Economy: Right, and
26:18
what you're talking about really is the deployment of the innovation at
26:21
this point, right?
26:22
You're not talking about the innovation itself coming from the government.
26:27
You're talking about basically creating a market for those technologies throughout,
26:32
as you say, the educational system throughout, probably government offices.
26:38
So that's great because that's also just going to boost the opportunities for
26:43
those Chinese companies.
26:45
>> Gary Rieschel: That's exactly right.
26:46
And another example, a lot of folks in the us a lot of people
26:52
in the venture community commented on the crackdown on private enterprise in China.
26:59
And I actually disagree with that as a premise because the private companies they
27:05
cracked down on were quite specific and there were very specific reasons for that.
27:11
The online tutoring business or home tutoring.
27:15
Well, number one, all the people doing the tutoring, or
27:18
many of them were teachers who are already being paid by the government and
27:21
they're making a lot more money tutoring than they were teaching.
27:25
So the government didn't like that.
27:26
It also didn't like the fact that they were teaching curriculum that
27:29
the government didn't control.
27:30
So again, they approach it from a control perspective.
27:34
So they shut down the teaching market.
27:36
Jack Matthew, all due respect to Jack, you're not allowed to have a school
27:40
of Jack Ma thought in the era of Xi Jinping thought.
27:44
And you're not allowed to free speak quite as freely as Jack did.
27:47
And so he was put in the penalty box for a number of years.
27:50
Tencent they restricted the amount of time that people could play games.
27:55
Maybe that's another idea for
27:56
the US that wouldn't be the worst idea that you can only use Douyu and
28:00
you can only use TikTok a couple days a week if you're under a certain age.
28:03
You can only play games a certain number of hours if you're under a certain age.
28:07
Some of these ideas are really not bad when you look at the concerns that people
28:11
have in the US about online gaming, social media, et cetera.
28:15
But again, these were fairly isolated, they were powerful and
28:20
they had rippled effects.
28:22
But it's not like they went to every Chinese entrepreneur and
28:25
said don't innovate or stop being an entrepreneur.
28:28
We don't see.
28:29
>> Elizabeth Economy: Exactly.
28:30
I think that's really, really important point.
28:32
One of the things when those, when that crackdown happened that occurred to me is
28:36
what, and it's you to your point about control,
28:39
is that really what they cracked down on were those
28:41
industries that dealt with the free flow of capital and the free flow of ideas.
28:46
And those are things it's not about, you know, innovation in biotech, for example.
28:51
They're not cracking down, you know, in that space in the same way nonetheless.
28:57
>> Gary Rieschel: Exactly, that's exactly right.
28:59
>> Elizabeth Economy: But, but nonetheless,
29:00
I think looking at the landscape today, it seems as though it hasn't really
29:05
rebounded and you said part of it's just the inability to get, you know, money out.
29:11
What else is going on, what needs to shake loose where sort of describe
29:15
what you see as the venture landscape today because it seems to me it's changed
29:19
a lot from US firms being deeply engaged, then your Chinese firms popping up, but
29:24
maybe even they're somewhat constrained.
29:27
Is the government basically, becoming the number one choice for
29:30
venture investing at this point?
29:32
Again, trying to pick the winners.
29:34
>> Gary Rieschel: What does it look like today?
29:37
It's definitely evolving.
29:39
I would say the transition time really occurred during COVID when foreigners
29:44
were not really able to or certainly chose not to go back and forth to China.
29:50
China had shut itself down.
29:52
All sorts of social repercussions came out of that.
29:54
But on the, in the venture side, a lot of the,
29:57
not a lot of the knowledge based people that would go over and
30:00
talk to startups weren't spending their time doing that as much.
30:05
Another thing that happened was, you know,
30:07
you had the beginning of the geopolitical during the first Trump administration,
30:11
you had some of the geopolitical concerns being expressed.
30:14
Biden took some of that.
30:16
You know, you worked with Secretary Raimondo.
30:18
You know, I thought that Biden did a serviceable job in his administration in
30:23
institutionalizing a number of the things that Trump may have said.
30:27
But Trump doesn't institutionalize things,
30:29
whereas the Biden administration actually institutionalized processes around
30:34
some of the restrictions, the semiconductor restrictions, and so on.
30:39
So I think that there were a number of those things that,
30:42
that had kind of cause people to hit the pause button.
30:45
But the single biggest issue is the liquidity side.
30:51
We have numerous LPs in Qiming that their venture allocation now is, exceeds their
30:55
entire private equity model, private equity and alternative asset model.
31:00
So you have someone who's 32% invested in Venture when 23% was supposed to
31:05
cover Venture PE, hedge funds, et cetera.
31:08
So that's a problem.
31:09
So the US IPO market having difficulty the last several years.
31:14
China basically shut down its IPO market for 18 to 24 months.
31:19
And so that combination, you have all this capital that's trapped.
31:23
I would submit there would be a different conversation on a lot of the geopolitics.
31:27
If the liquidity markets in China had kept a pace and had continued to that,
31:31
you'd have a lot of institutions saying maybe we will continue,
31:35
we will invest less in China, but we'll continue.
31:38
You'd have the geopolitical umbrella is a very convenient umbrella to hide under and
31:44
say that's why we don't want to invest in China because large pension and
31:48
endowments don't want to say publicly we kind of blew our model apart and
31:53
we don't have liquidity,
31:55
so that's why no one's going to want us to come out and publicly say that, so.
31:59
I think that that's really one of the things that's not getting enough
32:04
attention.
32:05
The liquidity side really to me is the primary issue.
32:09
The geopolitics.
32:11
The semiconductor industry spoiled the government in Washington DC,
32:16
because it allows for choke points.
32:18
And if you control access to the technology in those four or
32:22
five choke points, you really can throttle back someone's development.
32:26
AI is not like that.
32:27
Biotech is not like that.
32:29
So when I'm on these working groups and they say, well,
32:33
we want to constrain Chinese ability to develop AI for
32:36
two years I was saying that that wasn't possible.
32:40
And then, thank God, Deep Seat comes out in January and
32:42
tells everybody that's not possible.
32:44
Biotech, it's not possible.
32:47
A case comes out and says, we happen to have a drug that's better than Keytruda.
32:52
That's now first in class.
32:56
Sorry, not first in class, but best in class cancer drug.
33:00
And so I think that when you pick your babbles on technology restriction,
33:04
you need to be very realistic as to what the structure of that industry is and
33:09
what it is you're really capable of constraining.
33:12
And I would submit that AI with the US The US needs to focus more on,
33:17
as you mentioned, what I call diffusion of this technology in schools,
33:21
in companies, as rapidly as possible, and
33:24
then also around the world because there's still 4 billion people who
33:29
don't have access to the kind of technology we take for granted.
33:34
And the US needs to be the leader in helping them get
33:37
access to that technology over the next decade.
33:41
That's where leadership will come from.
33:43
It won't come from trying to constrain someone else from developing it.
33:46
Not possible.
33:47
>> Elizabeth Economy: Yeah, I honestly couldn't agree with you more.
33:50
I think we spend much too much time trying to think about how to slow China down and
33:56
not enough time thinking about how we enable ourselves to run faster.
34:01
I mean, I often think about it as.
34:02
As if you are actually in a physical running race and are you spending all your
34:06
time looking behind you to see, you know, is that person catching up and
34:10
trying to think about whether you could try to trip that person and stop, stop him
34:14
or her, or are you actually just focused on crossing that finish line first?
34:18
And I think over the past eight years, and certainly now,
34:23
I think I'm quite concerned that we're much more focused on that,
34:28
trying to slow down as opposed to trying to enable ourselves to run faster.
34:35
So let's talk about that sort of state of the competition between the United States
34:41
and China, that the Australian Strategic Policy Institute, known as ASPI,
34:47
has received a lot of attention for its Critical Technology Tracker.
34:52
And it basically looks to see how many papers are being published by
34:57
researchers in a country that are called high impact research papers.
35:03
And now it says China is the number one in 57 out of 64 areas of technology.
35:10
Robotics, advanced materials, biotech, cyber.
35:14
Do you think that this is a useful way of framing sort of who's leading
35:18
in innovation?
35:19
Do you think it's an accurate assessment of the state of, you know, competition,
35:24
if we want to frame it as a competition?
35:26
Competition between the United States and China,
35:29
how do you understand that kind of data?
35:33
>> Gary Rieschel: I think that data, what it does point out to me the big takeaway
35:37
from looking at that is maybe we shouldn't be using the federal government.
35:42
We shouldn't put the federal government in a war against the universities and
35:46
research institutions and saying that if you don't believe a certain way,
35:50
we're going to withhold funding from you.
35:52
Maybe I would take that and say, because that's where the research papers,
35:56
the kind of things you're talking about, that's where they come from.
35:59
And we've now pretty much declared that a number of our top institutions are not
36:03
going to be supported by the federal government in the way that they had been
36:07
in the past right at the time where I would submit to you,
36:10
it's probably more important than ever.
36:12
If you're really viewing China, us as a competition, then that's one of the areas
36:17
of competition you have to at least be equal or hopefully better in.
36:21
I think that the quality of Chinese research has improved dramatically.
36:25
When we used to look at things 20 years ago and
36:28
meet with the Chinese Academy of Sciences, there was frankly, very little.
36:32
The entrepreneurs were generally ahead of the research institutions in terms
36:36
of certainly how to use technology.
36:39
What the Chinese are really, really good at is this.
36:43
How do I say this?
36:45
They're voracious adopters of technology.
36:48
The Chinese citizens, the consumers, they try everything and they'll try it this
36:52
way, that way they'll do it, use it in ways you could never imagine.
36:56
One of Xiaomi's great successes in the early days was it did software releases
37:01
every week.
37:04
American consumers would go crazy if Apple said every week you have to have a new
37:07
software update that can take 15 or 20 minutes.
37:10
But what Xiaomi was doing was they were also soliciting input from all
37:13
their consumers and they'd roll those into the next releases.
37:16
It was phenomenally successful.
37:18
So the Chinese, the ability of that society to adopt technology,
37:22
very similar to the language.
37:24
You can look at the, you can look at the innovation capability of in society.
37:28
You look at the language.
37:29
How easily do they adapt new, new terms, new ideas.
37:35
And Mandarin and Cantonese are both Cantonese even when they Mandarin very,
37:39
very quick and good at that.
37:40
English is very good at that.
37:42
There's a reason why a lot of other countries don't adapt.
37:45
Their language actually is reflective of how the society is organized.
37:50
And I think that at the very broad basis we don't appreciate the value of
37:55
a society that is so willing to take new things and adopt it.
37:59
600 million people have downloaded AI apps in China.
38:04
My God.
38:05
And so- >> Elizabeth Economy: What's
38:06
the comparable figure in the US?
38:08
I don't know it.
38:09
Do you know what the- >> Gary Rieschel: The number in the US is
38:10
about 200.
38:11
200?
38:12
>> Elizabeth Economy: 200 million.
38:12
>> Gary Rieschel: 200 million.
38:13
>> Elizabeth Economy: Okay, so roughly half the population.
38:15
That's not so bad.
38:17
>> Gary Rieschel: No, no, I'm not saying it's bad.
38:19
>> Elizabeth Economy: Yeah, yeah, no, no, no, no.
38:20
I'm just trying to get a sense for so.
38:21
Because I think, you know, let me actually just push you for
38:26
a second because I do think this point about how China innovates and
38:31
how how it adapts technology is really important.
38:35
So just describe if you could in sort of
38:38
in short form China's innovation ecosystem.
38:41
Because when we think about something that the US could think about and
38:44
learn from China, it seems to me that's one of them.
38:47
You know, in terms of how it collocates universities and, and sort of innovation
38:52
ecosystems and manufacturing and all the different parts of the ecosystem.
38:58
Do you see something there that the US should be considering?
39:02
>> Gary Rieschel: I think that the US has quite a, quite a bit of the similar.
39:06
In fact, I think a lot of the Chinese co location model was Adapted from the U.S.
39:11
you know, you look at Stanford, you look at Berkeley, you look at Illinois, Tex.
39:15
Pick any one of these major universities in Boston.
39:18
There's very robust entrepreneurial ecosystems around those universities.
39:23
And the thing that the US had always been very good at is commercializing
39:28
those technologies.
39:29
Well, it turns out the Chinese entrepreneurs are also very good at
39:32
commercializing those technologies.
39:34
So I think that was a natural.
39:36
Those hubs were nat.
39:37
That's a natural formation that started in the US and now moved to China.
39:42
And it moved to China at some pretty significant scale in
39:45
a number of the major universities.
39:48
>> Elizabeth Economy: You don't see a difference in terms
39:49
of the manufacturing ecosystem?
39:51
>> Gary Rieschel: No, that's what I was going to get.
39:55
So then, when you're doing software, you have one kind of ecosystem that's.
39:59
Collaborative and innovative.
40:00
And there's something called the ant farm in Beijing,
40:03
I don't know if you've ever visited.
40:05
It's about 40 companies that are probably co.
40:08
Located in an area the size of our house.
40:10
And during the winter, the heat isn't turned above 55.
40:13
And during the summer the air conditioning is not turned on till it's 80 degrees.
40:17
And it's just this intense environment.
40:19
And companies come and go and
40:21
it's a y combinator on steroids without nearly the capital.
40:27
And so software can be developed that way.
40:30
Hardware cannot, hardware requires prototypes and
40:33
it requires actually the manufacturing process.
40:37
And again, since China now has a third of the manufacturing in the world,
40:41
they have a very, they have a vast and varied capability there.
40:45
So when you look at the innovation engine,
40:48
the invention still primarily comes outside China.
40:52
The, the completely first, first in class.
40:55
Something becomes, is coming from outside of China.
40:59
But then first in class doesn't win the dollars.
41:03
They get 10%.
41:04
The best in class get the other 90%.
41:07
The Chinese are very good about that iteration process.
41:10
So here's the invention.
41:12
And then the Chinese go, 1, 2, 3, and it's better.
41:15
And then they'll take that 1, 2, 3, and it's better.
41:17
And they're very quick at that.
41:20
They're very quick at that.
41:21
In tech, the manufacturing base allows them to do that in a way that the US
41:25
really will struggle to replicate, I think, in the future.
41:28
The pharmaceutical industry is starting.
41:31
There's a reason why $48 billion of license fees were paid to Chinese firms
41:35
last year by global pharmaceutical companies.
41:38
It's because their labs aren't generating the products they need.
41:42
And the Chinese scientists are.
41:44
There's unprecedented cooperation between global pharma and
41:49
Chinese startups in biotech development, unprecedented.
41:53
And so that's something that we tend to be quite intimate with on both of our,
41:58
both the US and chimney US and Chinese funds.
42:02
So I think that, that whole, that whole cycle,
42:06
the whole cycle time in China is very, very quick.
42:11
And I think that that's something that the US is going to have to figure out how to,
42:15
how to adopt or how to create.
42:18
Doing it at scale is hard.
42:20
There's a reason why Apple looked at building a car for six years and
42:24
I was told they spent 1 billion.
42:27
I've been told they spent 3 billion.
42:28
I have no idea.
42:29
It's some big note, Xiaomi.
42:32
Three years from the first concept to a car in production that
42:36
the CEO of Ford says is a very, very, very good Car.
42:41
How could they do that?
42:42
Xiaomi has over 50 suppliers of analog motors and wheels and
42:48
all sorts of devices to run all of its entire ecosystem of little vacuum.
42:55
And you think like, well, that's not the same as a car.
42:58
Actually it is, because electric vehicles are like LEGO components.
43:04
You take these 10 components and put it together and you have a car.
43:07
I'm exaggerating.
43:08
An internal combustion engine car, 2000 more different components.
43:12
That requires a lot more sophisticated robotics,
43:15
a lot more sophisticated human manufacturing capability.
43:20
EVs are toolkits.
43:22
And so three years start to finish,
43:24
versus six by arguably two of the most innovative companies in each society.
43:28
And I would submit, Xiaomi, people are not smarter than Apple.
43:31
No way.
43:32
But their ecosystem is much more responsive and
43:35
much more capable of moving into different areas like that.
43:41
>> Elizabeth Economy: So is that something realistically that you think
43:44
the United States could develop or
43:47
should we be looking to have ecosystems in other countries?
43:52
Are there other countries where there are going to be the new China, do you think?
43:57
Is there, is, is a country waiting in the wings that we should be focused on given
44:01
the, given the geopolitical realities of the moment, you know,
44:05
as you're looking across the globe, are there other places that you're looking?
44:10
>> Gary Rieschel: So when you say given the current geopolitical realities,
44:16
I would say there is no hope of the US ever being successful in this.
44:22
I am hoping that the current geopolitical realities are not the driving force for
44:27
too much longer.
44:29
If I think about how would I compete with China if we're playing the game,
44:33
the global competition game, we have North America and South America.
44:38
You have Canada, which has some really good capability.
44:41
You have Mexico,
44:42
which actually could replicate a good part of China's manufacturing ecosystem.
44:48
In fact, they already have.
44:50
Why are we treating them as adversaries?
44:53
We should be looking at the entire market, north and South America, and
44:57
that's our backyard.
44:58
It's primarily Judeo Christian upbringing.
45:02
It's an educated workforce.
45:04
It's completely independent of need from the outside world for
45:08
water, energy, food, et cetera.
45:11
It's nirvana as a market and we treat it as second class citizens.
45:16
So if I look at the inclusion side of diffusion.
45:21
The inclusion side is there is.
45:23
It's inexcusable that the US doesn't have a policy to have manufacturing in Mexico,
45:28
Costa Rica for medical device, that we're not cooperating and
45:33
making different parts of that backyard.
45:36
Absolutely world class in terms of supporting the overall wealth and
45:41
wealth creation in those two continents.
45:45
And I don't think it's that hard to figure this out?
45:48
I'm not the first person probably to come up with this, but
45:51
we're making it really hard.
45:53
>> Elizabeth Economy: Yeah, that's for sure.
45:54
I mean, I do think the Biden administration in the Chips and
45:58
Science act had $400 million to basically dole out to other
46:03
countries to be part of the semiconductor manufacturing supply chain.
46:08
And Costa Rica is one of the countries that was a beneficiary.
46:12
Whether that sticks, given current administration policies,
46:16
I think is not clear to me.
46:18
But I think this is, you know, a very wise suggestion.
46:21
And maybe once things sort of even out after this flurry of activity
46:26
from the new administration, maybe that kind of advice might be.
46:31
Might actually be heard.
46:33
>> Gary Rieschel: Well, I do.
46:34
Sorry.
46:34
I do think that the other thing that's changed, and
46:38
this is just how I think about how do you create gravity?
46:41
So 2014, China's GDP was 10.8, $10.5 trillion.
46:46
And the top eight tech companies in the US were worth about 1.5 trillion,
46:51
15% of that.
46:52
Today they're 100% of it.
46:55
So in the last 10 years, China's GDP has gone to 17 to 18 trillion.
47:00
And excluding the last market meltdown, you look at the end of last year, the top
47:03
eight tech companies in the United States had a market cap of roughly 18 trillion.
47:07
So market cap and GDP are different, but they do indicate gravity.
47:12
So what these companies now have is they are the ones who are going to.
47:16
Governments do not diffuse technology.
47:19
They set guidelines for the diffusion of technology, companies diffuse technology.
47:24
Companies can also be the ones to drive inclusion in new markets and
47:28
new people who haven't had access to it.
47:30
That's where the US Government should be spending its energy,
47:33
is figuring out how to work with these companies in new technology areas to both
47:37
propagate the technology and also make sure that people who've never had access
47:41
to it before get access to it in the future.
47:43
We are not thinking that way right now at all.
47:46
>> Elizabeth Economy: No, we're not.
47:47
I hope we don't have to wait another four years until we start thinking that
47:53
way again, because by that point it might be game over or we're moving very, very.
47:59
>> Gary Rieschel: It's never game over, it's never game over.
48:01
But it can certainly be a very inconvenient time.
48:05
>> Elizabeth Economy: Yeah, at some point, the game does end, though.
48:09
[LAUGH] Okay, let me just ask a couple of quick last
48:13
questions that I ask to every guest.
48:17
What book or article on China would you recommend?
48:21
If you could recommend one that people should read to understand the country.
48:26
>> Gary Rieschel: To understand the country,
48:27
that's a- >> Elizabeth Economy: Or
48:28
the US-China relationship, or just something that you think is important.
48:31
>> Gary Rieschel: The book that I actually think explains a great deal of China
48:36
is an older book, is by Sid.
48:38
It's Sidney Rittenberg's autobiography named The Man Who Stayed Behind.
48:43
And it tells his story of joining the Chinese Communist Party,
48:46
being in prison twice, running the Chinese radio station, coming out, and
48:50
then advising Greenberg, advising Intel.
48:52
So it's a good story of someone who went on a very,
48:55
very long personal journey and really experienced the best and worst of Chinese
49:01
society during the period of Mao and through the Cultural Revolution.
49:07
I think that that, to me, is a.
49:09
I mean, again, if you want to understand China, I mean,
49:13
I think that your books on Xi Jinping, Kevin Rudd's books on Xi Jinping,
49:17
critics, Chris Miller's book on the semiconductor,
49:21
I mean, there's a lot of good material, but do they help me understand China?
49:26
They understand people in China.
49:28
But I think Sidney's book really captures the essence of what it was like to
49:33
be in China when the current version of China was created.
49:37
>> Elizabeth Economy: That's a great pick.
49:39
What issue do you think we don't understand enough about China?
49:44
What do you think we kind of get maybe wrong?
49:47
>> Gary Rieschel: It's not a central planned economy.
49:50
The next time I hear the government, well, and it's easy to understand why.
49:55
Because the US government, all the elected officials, they would love to have
50:00
China be a central planned econ so they can say, that's what we need to do.
50:06
It's not, and it's not what we need to do.
50:10
>> Elizabeth Economy: Okay, but now you forced me.
50:12
So do you think just Act is not a good thing?
50:15
Now you opened a big door to me,
50:17
having worked in the Commerce Department right at that moment.
50:22
Do you think that that's the wrong way to go then?
50:25
>> Gary Rieschel: No.
50:26
There's a difference between looking at tactics around things you need to do for
50:31
the future.
50:33
Biotech, AI, solve immigration, but make sure the smartest people
50:38
in the world still want to come and live and live and study in the US.
50:42
Those are very, very important tactics as we look forward to
50:47
recreating the technology society in the US Making it more flexible and
50:52
more resilient, if you will, to competition in the future.
50:56
Those are all great things.
50:58
What I mean is that somehow the US Government is going to pick the winners.
51:04
And so the guidelines, the incentives, those are great things.
51:09
But you shouldn't be invested in who the winner is or what the winner is, and
51:14
I think that's a distinction.
51:16
The US Government likes to think that China actually,
51:18
no one's good at the latter, no government's good at the latter.
51:22
You can be good at the former.
51:23
>> Elizabeth Economy: So that's a good, a good list of things for
51:26
the Trump administration to consider in terms of how it can help
51:30
the US Continue to be a leader in innovation.
51:33
Is there anything else you want to add to that list?
51:35
If you had President Trump's ear right now, what would you say?
51:40
This is what we really need to be doing, Mr. President.
51:45
>> Gary Rieschel: In the spirit of not wanting to get too down the political
51:48
rat hole, technology carries values with it.
51:51
So when you distribute technology around the world,
51:53
I do believe values go with that technology.
51:56
It goes with the software, it goes with the hardware,
51:58
it goes with how you train the people, how it's used.
52:02
We should be thinking much more about, instead of just trade being
52:07
parcels going back and forth, what is that trade really doing?
52:12
What's the trade really doing to better the American, for
52:16
the American worker, lots of things can be done.
52:20
But planning on reshoring automobile plants that employ far fewer people,
52:24
that's not going to happen.
52:26
Lutnick came out a week ago and said, well, we're not gonna be employing people,
52:29
we're gonna use robots.
52:31
It's like, okay, well, good, he's at least being
52:34
honest that this isn't gonna go the way that people are talking about.
52:37
So I think that you have to start with the values.
52:40
What are the values that you're really trying to propagate around the world?
52:44
If you win that, if the values that go with the technology are the long term good
52:49
values for America, America's going to win and it will win huge.
52:53
And I see the current administration paying no attention to that whatsoever.
52:58
>> Elizabeth Economy: That's a big,
52:59
big issue that we could spend a lot of time on of what constitutes values.
53:04
>> Gary Rieschel: I mean, the venture world, the venture world,
53:07
the money's down to invest in China.
53:09
And so it's actually, perversely, it's creating maybe the best investment
53:14
opportunity in many, many, many years because there's so
53:17
little capital that the capital has very little competition for deals.
53:21
So I would actually expect that what will come out of China from an investment
53:25
return perspective over the next five to ten years or
53:28
the next five years certainly will be very, very good.
53:33
And that's just because they have constrained the dollars going in.
53:36
So if you have the dollars, the entrepreneurs didn't die, you know, and
53:41
the entrepreneur's ecosystem is still very, very robust.
53:44
So you have the same amount of capital that was available 20 years ago in
53:48
a vastly larger and more sophisticated ecosystem.
53:51
I view that as a good investment bet.
53:54
>> Elizabeth Economy: Yeah, I'm not sure that that's gonna be where the Trump
53:57
administration- >> Gary Rieschel: No,
53:58
I'm pretty sure it's not- >> Elizabeth Economy: US policy.
54:00
>> Gary Rieschel: [LAUGH] >> Elizabeth Economy: [LAUGH] Okay,
54:01
last question.
54:02
On a scale of one to ten, what do you see as the likelihood of a Nixon Mao
54:07
moment emerging between President Trump and President Xi?
54:11
>> Gary Rieschel: Trump is not Nixon, and
54:13
there's certainly no Kissinger alongside Trump.
54:18
Mao, Xi Jinping is not Mao, and that may be good.
54:24
That may actually be better.
54:26
I think China may actually win on that trade.
54:28
I don't think we win on that comparison.
54:30
So the chance that there'll be a fundamental reset
54:34
that will lead to eight to ten years of assessing each other and
54:39
lead to much more positive outcomes, the chance is less than 10% to me.
54:45
I think the Trump administration has grossly overestimated,
54:48
overplayed its own hand.
54:50
I think that, you know, they pay, don't.
54:52
They don't pay attention to the fact that there are $20 trillion worth of savings in
54:57
Chinese accounts.
54:59
I don't think they pay attention to the fact that the Chinese people
55:03
are incredibly gritty and able to really grind through pain.
55:08
So Xi has on his side a group of people that are very,
55:11
very capable of withstanding pain and suffering.
55:14
They don't like it, and it's certainly not sustainable forever,
55:18
but I think it's much more sustainable than what we have in the United States.
55:22
And trust, to me, the US has always been based on trust.
55:27
Our entire systems are based on trust.
55:29
And trust comes from predictability, and it comes from the laws.
55:33
What we're doing now is we're actually taking away the predictability.
55:36
Trust erodes quickly when there's no predictability.
55:39
That's always been the weakness of China.
55:41
With the capital markets, you couldn't predict.
55:44
Well, right now, I'd have to say maybe China is entering a period
55:49
where it's going to be more predictable in its behavior than the US.
55:54
That's a problem for the US.
55:56
>> Elizabeth Economy: So, Gary, on that note, let me thank you for
55:59
a discussion that was filled not only with information that I think
56:04
is extremely interesting about this state of venture capital.
56:09
But really I think filled with wise words about how we should be thinking,
56:15
we in the United States should be thinking about who we are and where we want to go.
56:21
And about the nature of the competition with China and how ultimately we can
56:27
in fact emerge as a continued leader in the innovation space and then some.
56:32
So if you enjoyed this podcast and want to hear more recent discourse and
56:36
debate on China, I encourage you to subscribe to China Considered via
56:40
the Hoover Institution YouTube channel or podcast platform of your choice.
56:44
In the next episode, I'll be speaking with Michael Dunne, one of the world's foremost
56:49
experts on China's auto industry will help us understand how China got where
56:53
it is today and whether the US Auto industry can still be competitive.
56:56
Thank you again, Gary.
56:58
>> Gary Rieschel: My pleasure.