During October 25-26, 2019, Source Code Capital held its 2019 Code Class Annual Meeting in Beijing, China. This year’s theme was “Venturing Depths, Searching for Essence.” “As a tree needs deep roots to grow and stand tall, so a building needs a solid foundation in order to properly stand.” When uncertainty becomes the new normal, while competition for limited growth is on the rise, essence becomes all the more precious. More than 300 CEOs, top scholars and investors gathered together during this event to discuss the direction of future development in the venture capital industry, and discourse the underlying philosophy of business.
Introduction
With the gradual disappearance of China’s market expansion bonus, competition in a consolidating economy is greatly intensified, particularly in the second half of China’s Internet economy. Internet companies sounded the horn to enter the era of industrial Internet. This opened up a new competitive arena as companies raced to seize the new market, define it and its ecosystem, and try to gain market share and establish influence. Since 2014, Source Code Capital has been researching and reflecting deeply on the Industrial Internet.
From 2014 until now, Source Code Capital has been investing in a number of excelling Industrial Internet enterprises. This includes being the sole investor in Baibu, leading Baibu’s Angel round, A and A+ round , and continued investing in the B and C rounds.
Back in 2015, Source Code Capital was the sole lead and led YQNLink’s A round, then continuously increased its investments in the B and C rounds.
In 2016, we were the sole lead in Ruigushop’s A round as well as its B round. Similarly, we supported Yimidida since the A round, and extended support in the B, C, and D rounds. We became investors of Yijiupi starting in the B round and continued to extend our support after, all the way from the C round to the latest D round.
In 2017, we were the leading investor in XiaoYaoYao’s B round, and increased our investment in its C+ round.
In 2019, we led the B round investment for Zhongneng United, and co-led the C1 investment round of Casstime along with Sequoia Capital.
Over the years, Industrial Internet companies in Source Code Capital’s portfolio have gradually become star enterprises in their respective subdivisions. We wanted to explore the core driving force underlying their volume growth and figure out the kind of “corporate DNA” that can enable such companies to grow beyond their industry’s limits. For this reason, the Founders of four enterprises, XiaoYaoYao, Yijiupi, Zhongneng United, and YQNLink, were invited to Yanqi Lake to discuss the boundaries and breakthroughs of industrial Internet at Code Class.
Founder Quotes:
*The biggest difference between the industrial Internet and the consumer Internet is the following: Consumers in the latter are largely homogenous, therefore adding more channels is enough to facilitate growth. But the users of the former, the industrial Internet, are different. It’s useless to diversify channels and expand the old-fashioned way.
*To B service providers do business and logistics at the same time, and may as well do finance.
*The “data experience” forms the core “customer experience” for the logistics service business.
*The key to figuring out how to maintain low costs in distribution, in essence, is to solve the problem of warehouse sharing, distribution sharing, and as much as possible, shorten the end-to-end cycle from the factory to the supply chain.
Based on this panel discussion, we can conclude that the first boundary broken in the industrial Internet was the limited capabilities of the industry players. In the past, the number of operation SKUs, the scope of operation coverage, or the index of operation growth indicators, were somehow limited, but has now been greatly expanded. Secondly, the division of labor and positions in the industrial chain have been reintegrated. The industrial Internet has integrated or consolidated multiple businesses for better cooperation, thereby enabling the company to advance to the front of the industrial chain, or to evolve to the downstream.
For example, XiaoYaoYao has the best cross-border team to keep maintaining its edge; Yijiupi improves the efficiency of the distribution network for FMCG products; Zhongneng United focuses on gathering data and information in order to improve the efficiency of asset leasing; YQNLink solves and integrates a previously fragmented cross-border shipping and transport system. These are examples of core strengths required for industrial Internet enterprises if they want to stay competitive.
Source Code Capital will continue to be committed to explore the boundaries of industrial Internet together with accomplished CEOs, in order to create enduring real value together.
Q1: Source Code Capital, Wang Xingshi: We have been investing in the industrial Internet since 2014, and we are honored to have grown together with many industrial Internet partners. Growth is constantly pushing the boundaries further out. But what are those limits of the industrial Internet? Today, we invite four CEOs to share their views. First, let’s ask each CEO to briefly introduce his or her company.
XiaoYaoYao, Li Meng: Hello everyone! I’m Li Meng, the founder of XiaoYaoYao. It is the largest independent B2B platform of pharmaceuticals wholesale and distribution in China. We are also the company with the strongest information advantage and have the biggest number of service providers in the pharmaceutical industry. We hope to shorten the circuit of drug (medicine) production and availability, and improve the efficiency of the whole industry through the use of Internet and information technology.
Yijiupi, Wang Chaocheng: We are an industrial Internet company in the FMCG industry. Our market scale is the largest in China. Our mission is to use technology to enable cheaper and more efficient access to good products, and shorten the supply chain.
Zhongneng United, Yang Tianli: Hello everyone! I’m Yang Tianli, the co-founder of Zhongneng United. We are a digital leasing service platform for engineering equipment. There are about 3 trillion assets available in the service equipment market in China. Those assets represent an annual rental income of about RMB 700 billion, while the operation efficiency of the whole industry is capped at only 50%. What we want to achieve, is to use technology and data to improve the efficiency of the whole industry and improve the asset efficiency.
YQNLink, Zhou Shihao: Hello everyone! I am Zhou Shihao, the founder of YQNLink, and also an “older” classmate of Source Code Capital (since Fund I). YQNLink is the number one international logistics services platform that helps Chinese import and export enterprises to better connect with the overseas markets, transporting goods from China to the United States and the rest of the world, and vice-versa. This year, our container trading volume reached 250,000 TEU. In the face of growing uncertainty in global trade, YQNLink has turned itself from a China-centric company to a global service company. With many new challenges still at bay, we require working with all of you here.
Q2: Source Code Capital, Wang Xingshi: What boundaries have you broken in your industry since the company was founded? Where will the next border be?
XiaoYaoYao, Li Meng: Before we entered this industry, the pharmaceutical industry was very fragmented. The distribution was split into a multitude of different layers. After the drugs were produced in the factory, they enter into a state of multi-level distribution, which is not a simple linear distribution, but a network structure. XiaoYaoYao connects manufacturers and terminals, and makes the intermediary links relatively transparent. In addition, with Internet, we can break regional boundaries, giving us greater ability to ensure our expansion. With this ability, we can then better help drug manufacturers improve efficiency in a wider range. For example, after we have data direct connection with some factories, we can determine future production expectations based on data, and reduce the impact of API price fluctuation on production.
After helping manufacturing enterprises, the next boundary is to better serve our customers (pharmacies, clinics, hospitals). We want to give them better information services and help them improve their ability to serve consumers. The biggest difference between 2C and 2B is that 2C saves money for customers, whereas we want our customers to make money. We need to do all kinds of empowerment for our 2B customers, not only on the supply chain, but on several levels, such as information, operation efficiency, background management, brand promotion, etc. That is our next goal.
Yijiupi, Wang Chaocheng: Many people’s view of the industrial Internet is that you are a big wholesaler. I think this is a very shallow and rather ignorant perception. The development of Internet technology has three major impacts on the industrial Internet boundaries: the first one is horizontal, it is the increase of SKUs. Because we use computers to manage SKUs, low-frequency turnover SKUs use central warehouses, high-frequency SKUs use front warehouses, especially low-frequency SKUs use general warehouses. We are also concerned with regional aspects. In the past, being a one-city dealer was fine. Now we are present in 27 provinces, which is a border breakthrough on the horizontal scale. Of course, many enterprises have been internationalized as well.
The second is a vertical breakthrough. The biggest difference between the industrial Internet and the consumer Internet is the following: Consumers in the latter are largely homogenous, there is only one end-consumer, so to address the problem of users, adding more channels is enough. But adding channels to the industrial Internet is not a good solution for several reasons, one of them being that the number of extensions is limited. You need to go deep, first connect the trader all the way to the end of the supply chain. Then you have to connect the factory to the end of the supply chain, and finally connect the raw material supplier, the factory, and the end of the supply chain altogether. This connection differs from the previous two. It is very deep, and represents a major vertical boundary breakthrough.
The third big innovation is innovation in logistics and capital flow after the commercial flow. We possess numerous businesses all over China, ranging from upstream to downstream, and can as well provide a financial supply chain. Our warehouse has the inventory and we have after-sales capabilities, therefore we can provide loans to upstream suppliers and create a financial link better than banks. This year we expect a growth numbered in billions.
I think the next frontier is to build an infrastructure that connects Chinese manufacturing and consumption circuits, and create a technological driven infrastructure in China’s circulation industry.
Zhongneng United, Yang Tianli: Our asset scale, income and profit have been growing at a growth rate of 200% – 300% for the last three consecutive years, which is astonishing in terms of the development for China, or for that matter for the whole industry (Europe and America). In the process of our rapid development, the efficiency of our entire asset operation has reached 80%. In 2019, we also accounted for a new increase of 35% in China’s high-altitude platform equipment, which is a rarity in the global development track of equipment. Finally, as a digital company, we have dozens of hardware and software patents, which is inconceivable to others. The logic behind these numbers is supported and realized through technology development and data collection.
We formed many algorithms and models based on technology and data during this whole expansion process. These algorithms and models provide insights for the construction of infrastructure for future cross-categories replication, and improvement of the asset efficiency in the whole industry.
For the next step, we have several ideas. First, make the high-altitude equipment leasing business more in-depth and thorough in China. Second, in 2020, we will launch the transition from leasing equipment to providing value-added services for customers. Lastly, we will carry out other engineering-related businesses and try to extend into new domains. These are some of our plans for the next two to three years.
YQNLink, Zhou Shihao: In fact, to B service providers do business and logistics at the same time, and may as well do finance. The first breakthrough is to help the demanders and suppliers of logistics services to match the demand-based and extensive SKUs quickly. Second, logistics is a matter of performance. When customers pay for the freight, they base the price on a comparison from certain logistics results. When we perform internally, we also reshape our task-based driving engine. Finally, we have redefined the boundary of customer experience in the logistics industry. We began to define more and more intuitions. Up to now, we have determined that data experience is the core experience of customers in a logistic service scenario. We do not need to care about the interface or the lowest price in the market. Instead, we need to care about how the pricing standard data is perceived in the performance process.
We know that the Internet is a cross-region and a cross-language platform. So we should constantly formulate more detailed and more consistent logistics services standards in each national market, and based on regional regulations. We are targeting small and medium-sized customers and serving large and global enterprises based on data. We must make the differential standard as small as possible before we can freely combine them. From this point of view, the continuous iteration of data and algorithm is one of the major boundaries we must break within the next two years.
Q3: Source Code Capital, Wang Xingshi: Everyone has made a lot of breakthroughs in their own respective industries, some are “access thresholds” and others are “cognitive thresholds.” How are your companies able to keep pushing the limits? What are your abilities? How can each company build its own capability?
XiaoYaoYao, Li Meng: Let me share with you how to map out talent. The first would be to consider people from the same industry, but what if there is a prohibition of business or non-compete problems? Ask your HR about this. In fact, in many cases, we can consider similar forms of talent or similar skillsets across industries. First, lock in a company, then lock the talents in the company. You have to split the department and look for people, because you cannot just work on one company. Only when your core department has a highly competent benchmarked team can you continue to develop. The competitiveness of your team is the key to win the competition. Most of the time, everyone does the same thing, there is no secret among us, but why did I win? Traditional industry or Internet industry, it doesn’t matter. Ultimately, who does it better, does it. And how? By regrouping efficiency, diligence, and having the stronger team.
Yijiupi, Wang Chaocheng: For us, the core of the industrial Internet is circulation, and the essence of this business is cost advantage. We need to use the distribution channel to transport the upstream things to the downstream. The pipeline structure design must be low-cost and cheaper than the traditional pipeline. But the shopkeeper is an extremely professional purchaser. He repeatedly buys the same thing over many years. It is very important for him to get a 3% – 5% discount. So, the most important thing is to provide him with a low-cost source of goods in a one-stop, convenient, and efficient way. With the same supply, keeping a “low-cost model” becomes the core competence of our company. No matter how complex your business model is, there are only two links between the company and its customers: the numerator is the commodity, including the sufficient abundance of commodities, and the denominator is the price.
The key to solving the problem of “maintaining low costs” in distribution, in essence, is to solve the problem of warehouse sharing, distribution sharing, and as much as possible, shorten the end-to-end cycle from the factory to the supply chain. Now what are the core competencies for the next step? Maybe to make the goods better. Now that we have the data, we can increase sales and delivery capabilities. Next, we need to force the factory to improve the quality of products. This is the most important thing for the whole industrial Internet economy in China. In the end, things are getting better and cheaper. This must be the interface between the industry Internet and customers. But in the first stage, our essential competence must be being able to manage with low cost.
Zhongneng United, Yang Tianli: We believe that there are two principles in the industrial Internet transformation. The first is to improve the efficiency of the original industry. The second is to provide better services for customers through having better insights into customer needs. But in 2B related industries, there is a very interesting phenomenon. After you generate a lot of data in the operation process, based on demand, a certain logic will be introduced. This newly created logic will in return help create new algorithms. After new algorithms are generated, technology will produce very large applications in the field of 2B, which is called “intelligent application.”
After the data system is connected, the sales personnel can carry out intelligent sales. First, how does he plan his daily sales route? Second, what kind of customers do you meet, and what kind of solutions do you provide to them? Third, what kind of competitive script should be adopted when encountering competitors? Sales must be made with intelligence. By improving the efficiency of this aspect, the efficiency of the whole industry has also been greatly improved. At the same time, this can improve the performance of the whole company. Therefore, intelligent application in the construction machinery industry, in the whole process of industrial upgrading and transformation, is a very interesting phenomenon.
YQNLink, Zhou Shihao: We have an internal plan called “interconnection.” Logistics has two kind of connections. One is asset-based, the other one is the human-based connection. Asset connection refers to the connection of vehicles, ships, docks and warehouses. Internally, we have formulated our own thesis and judgment, which is that except for Africa, the lack of logistics assets in the whole world, especially in China, the United States, Europe and Japan, is not high. There are a large number of warehouses, cars and ships, but they are not effectively utilized. In terms of transportation and logistics cost, the best way to reduce the logistics cost is to re-use different transportation tasks. Only when all available time and space are used, then can the maximum efficiency be reached.
Based on the connection between things and systems, great things must be done by connecting great people. For the core team, when it comes to linking people and finding the right people to bring in more overseas resources, I think it is necessary to spend enough time on the important things, and make clear what the company does overseas. Another thing is not to let them think that your founder and core team will always regard themselves as a Chinese company. Particularly when expanding abroad, you will find out that foreign employees will consider you differently, thus making it hard for them to adhere to your vision sometimes. So one is the connection based on system resources, the other is the connection based on people. During the connection process, we will have the ability to gather more data, in order to create future algorithms, which will result in cost and distribution advantages.
