This is a presentation from Ms Yuemei Lv, who has invested in several unicorn cases on internet+ and is now an associate partner of Lightspeed China Partners (LCP). LCP is a leading venture capital firm in China focused on early-stage investments in Consumer Internet, Internet+ and Enterprise/Deep tech. LCP offers international value-added capabilities through its relationship with Lightspeed Venture Partners, a global venture capital firm managing over $6 billion of committed capital.
Many years ago, when we talked about B2B, investors would talk about excess capacity, and the government would talk about supply-side reform. Centered around the topic of excess capacity, everyone would discuss about disintermediation – servicing customers downstream through integrating logistics and financial services.
After five years of actual practice, some of the verticals, such as medicine, FMCG and groceries, have seen clear leaders emerge, like Yao Inno., Yijiupi and Meicai; in many other sectors, including car parts and MRO (Maintenance, Repair and Operations), we still see a competition of multiple business models without a clear winner; in others we do not see any big company, which obviously cast doubts in the confidence of investors and entrepreneurs.
Today I will attempt to analyze the current situation. In the past, when you look at the value chain of any industry, you would clearly divide it into 2B or 2C. When you meet a new investor, you would try to first confirm whether they focus on 2B or 2C; in the eyes of entrepreneurs, investors are divided clearly into 2B focused and 2C focused.
2C landscape today
2C is about consumption, about traffic; while 2B focuses on supply and supply chain. Entrepreneurs have been exploring 2C internet for more than a decade, and 2B for at least five years. In fact, both have evolved a lot.
We look at 2C first. The whole consumer internet landscape is evolving significantly, and fast. With the rise of mobile internet and consumption levels, e-commerce and franchising at the retail side have both grown in leaps and bounds over the last three to four years.
The GMV of Taobao reached CNY6 trillion (US$852 million) last year, JD CNY1.77 trillion (US$251 million), and Pinduoduo CNY 471.6 billion (US$67 billion). The three of them, collectively, cover about 69.4% of all consumers in China.
Social e-commerce and fresh food e-commerce both started in 2014 and have grown rapidly since. In 2018, the total GMV of social e-commerce reached CNY600 billion (US$85 billion), and fresh food e-commerce CNY200 billion (US$28.3 billion). Offline convenience stores and grocery franchises are growing rapidly as well.
Another example is the car parts industry. Car workshops but not individuals are the terminals in this industry, and this is a typically 2B2C business. Nonetheless, the industry is quickly turned into e-commerce and franchises. In the sub sector of the consumables parts – the top four companies have more than 1000 outlets combined; in the area of full vehicle parts, e-commerce has achieved a monthly GMV of CNY200 million (US$28 million).
The changes 2B is experiencing
Now let’s look at the 2B business. The keyword is no longer just excess capacity – in fact, that issue has been addressed by many players in the industry.
The first issue is that, because of the heated competition in retail, the gross margin of every part of the value chain upstream is being squeezed. In most industries, gross margin will remain low for the foreseeable future. The gross profits for FMCG and fresh food are typically between 5%-15%, while margins in industrial raw materials and commodities can be lower than 5%.
Secondly, the chain is not that long. In fact, there are often only two steps: wholesalers (responsible for inventory and financing), and retail stores/terminals (in charge of selling and customer service). There are no intermediate steps to get rid of – showing how squeezed the downstream supply chain has become.
Number three, the manufacturing sector in China is huge, with disparate productivity levels. But those most efficient players are being selected. They improve their efficiency through AI, flexible manufacturing. And some upgrades themselves from OEM factories to their own brands.
In addition, our infrastructure has evolved amazingly. The number of mobile internet users in China has grown from about 700 million in 2014 to 1.138 billion in June 2019. Do not underestimate these 400 million additional users – they comprise of exactly that massive amount of small business owners in the value chain.
When you look at logistics, everything is online, from inter-city cargo to last mile, from transportation to warehousing, from electronics to groceries. All the industries are building their own platforms or plugging into general online platforms.
Our mobile payment is ranked number one globally, with a penetration of over 68%. Mobile payment now has even penetrated most of the rural users and old people. This is far ahead of probably any major market in the world.
2B and 2C will intersect
All these changes signify that the 2B and 2C businesses are no longer separate – they are closely interlinked now. In the future, factories to retail/e-commerce/service stops might be the only B2B value chain left. The demand of consumers is driving a lot of changes in the supply side.
On the 2C side, it is no longer just about traffic. With consumer traffic having stabilised among the major, the competition will focus on supply chain efficiency. Every 2C company will also become a supply chain company. All the companies will be broadly divided into three categories: supply chain+ecommerce, supply chain+franchise, supply chain+single store.
Here we define suppliers as S, end consumers as C, and everybody in-between, including retail stores, service kiosks and e-commerce sellers, as b.
Therefore, the business models of Taobao, JD and Pinduoduo can be broadly categorised as S2C; there are also a large number of S2b2C businesses, notably Yunji and Aikucun for online, as well as 7-eleven, Hema, Yonghui and Qdama for offline; Yijiupi, Yao Inno. and Meicai are some examples of S2b businesses.
Opportunities created from this evolution
With this redefined viewpoint, we can answer the question: where are the opportunities in the future?
One opportunity is: the whole industry in China is still in a magnificent iterative phase. Our advantages include good infrastructure with connectivity across every single step; strong consumption power in the biggest single market; and massive room for further optimization of the supply chain.
In this backdrop, the next growth opportunities for sure will come from the fundamental shifts in whole industries. As an investor, I chose to focus on 2B in 2014 because it was a blue ocean. Now, the trends are clearer and clearer, we will keep our focus on 2B but not the narrow sense of 2B, but the whole flow of goods, including supply and consumption.
The graph above shows the details of a few industries I mentioned before. Red text means that mature companies already exist in that vertical. As we can see, this is already the case in FMCG, groceries, medicine and fashion. However, the market in China is massive. In detailed sectors, although there are bigger companies, the landscape is far from set. On the right-hand side of the graph, you see a lot of blue ocean opportunities, in verticals such as car parts, home furnishing, MRO and petrochemicals.
When you look at a detailed vertical, you need to be able to tell the percentage and trends for three major models (e-commerce, franchise and B2B). For example, in FMCG, often e-commerce dominates; while in medicine, both B2B and franchise are the norms. Because of differences in the competitive landscape, gross margins, frequency of transactions, payment methods and policies, the evolution of each vertical is different.
It is also worth mentioning that the image above only covers a few selected industries – we have not covered agriculture and industrial raw materials for example. They are typically at the upper stream of the industry, with bigger volumes, heavier capital investment, and lower gross margins – in a way more difficult to penetrate. However, they are facing the same disruption and infrastructure development – we need new and innovative B2B models to create efficiency. You are welcome to join this journey of discovery.
Let’s ride the new wave
We are seeing massive opportunities. There will be companies emerging with market valuations of ten billion dollars, or even 100 billion dollars. Let’s ride the trend, combine both 2B and 2C, and build good business models that contribute to the upgrade of whole industries.
