Like Swimming with Piranhas – Entrepreneurial China, with Zak Dychtwald
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From Asia Society Switzerland, this is State of Asia. My name is Rem Koutanis. A defining characteristic of the environment in China has been its pace of change. And that has its impact on the latest generation of Chinese entrepreneurs who need to innovate to meet the tough demands of Chinese consumers. The message is as brutal as it is straightforward. Adapt or get washed away. Something European and American companies who are active in China are finding out all too well these days.

Running a business in China is kind of like permanently swimming with piranhas, is how Zach Dykwald, our guest on this episode of State of Asia, describes it. But if you get out on top and know how to compete and survive in the extremely fierce Chinese consumer ecosystem that is way more demanding than that in Europe or the US, you can thrive globally and have the potential to destroy the competition.

Zach is the founder and CEO of Young China Group, a consultancy decoding China's market, workforce and geopolitical shifts. Having returned to China after COVID, Zach has over a decade of first-hand experience in China. He really rose to the spotlights with his 2018 book,

young China in which he takes a close look at the generation born after 1990 and issues they're dealing with as they're shaping their country and with that impact the world. Zach recently spoke with my colleagues Nico Luchtsinger and Serena Jung. Zach, thank you for joining us. With the recent so-called deep-seek moment, Chinese innovation has come front of mind for many people.

and it at least feels like a major shift has taken place. After years of de-risking, the long COVID lockdown and economic downturn, China is back and has products on offer that are highly competitive, both in quality and price. You have lived in China for many years, working directly with companies based on what you call a people-first approach. And you've returned to China in 2023 after it was possible again earlier

after the pandemic. And I wanted to ask, what's your view? Have you been surprised by DeepSeek? And would you agree that its moment is marking this kind of shift? Well, first, thanks for having me, Serena. It's a pleasure to be here. And I would say the most surprising thing of the DeepSeek moment

is how much it surprised the world. Over the last sort of four years, so let's call it 2020 to 2024, we've sort of lost sight of China beyond this sort of big China. And when I say big China, I either refer to big government, which for the most part is scary to people,

Or big economy, which is either exciting or scary, depending on which side of the coin you're focusing on. And we're certainly in a more depressed mode, late 2021 through 2024, arguably still now. But that doesn't mean that the quality of innovation took a major hit.

The deep-seek moment was an incredibly large splash globally, and it resurfaced a reality which had continued to exist these last four or five years. We just had lost sight of it, which is that China can innovate at a world-class, world-changing level. Where China really thrives is not the zero-to-one innovation, which I think we typically focus on when we think of that word, but the one-to-ten innovation.

And I think DeepSeek is definitely an unbelievable exemplary view on that. But if you look over these last four or five years, you have companies like BYD, which have sort of less obviously, but probably more effectively shown what that type of innovation can do on a global scale.

Can I jump in to ask a BYD question since you've just mentioned it? BYD to me in a way is instructive for a number of reasons. It is not a car company originally. They became big by making batteries.

But somehow they managed to become the world's largest producer of electric vehicles. I wanted to ask you a little bit on how you feel China pulled off becoming the leader in EVs. Because notably, China tried to become the leader in combustion engine cars before.

for a long time and largely failed. So it took kind of a technological shift, which you're right to point out that didn't originate in China, sort of the kind of the zero to one innovation on EVs arguably happened elsewhere. But still, a lot had to go right. And a lot of sort of new ideas and new things had to happen for China to be able to get to the position that it's at. What were these things? Why was China so successful in developing its EV industry versus ICE industry in the

past? What was the, what was the differentiator? So I want to nuance this question a little bit, Nico. So I, when we talk about when China did this or when China did that, the first place our minds typically have always government. And even if, you know, trying to explain the last 40 years of economy, what people sort of imagine is a big sort of authoritarian government, uh,

leading the economy in specific directions and everyone following suit. If a strong central government was all it took for an economy to be successful, there'd be a lot of economies around the world that followed a more China or Chinese path over these last 30, 40 years. So on the government side, just to start with that, these areas where China can sort of...

do several birds with one stone, if you will, which are typically called strategic emerging industries by the government, become major areas of focus, investment, and priority. New energy vehicles are a really good example of that. Those multiple birds are this. First, it solves a domestic problem.

Domestically, China had failed to create an ICE vehicle or brand that really made global impact. Domestically, the quality of air in Chinese megacities was causing serious domestic grief.

In 2013 or 14, I don't remember exactly when it was, there was this documentary under the dome, Chongding Jisai. It had like a really famous Chinese media personality, I think actually a CCTV presenter, who went around and did this major documentary on the quality of air in major cities. And it got millions of views in about a week, had to be taken down. I mean, the level that it resonated with the people was

In Suzhou, where I lived in 2012, you'd bike from one side of the city to the other, you'd blow your nose, and it could be black on a bad air day. That's gone now. I mean, part of it is manufacturing, absolutely. But for these people, human-dense cities, New York is the smallest city I've lived in in the last 15 years, just to give you a taste of what it's like here. And taste is the right word. These cars really do impact quality of life.

And for a government who, even though, again, we typically think that there isn't a lot of communication between people and government, the government here is highly incentivized to make people happy. And so air quality is one of those areas. The third bird with this stone, just to keep pushing this metaphor to its limits, is opportunities for global leadership.

So it's been clear that new energy vehicles are going to be an area of global investment for a long time. That's not new.

And catching up to the US in particular, but also Germany with ICEs was looking less and less likely. And so leapfrogging that and looking, OK, where could China actually be a world leader? And where do we have the technology? Where do we have the technologists? Where do we have the right entrepreneurs? Where can we leverage our

our supply chain exceptionalism, as well as our bargaining power, particularly with the central government. And you look at battery supply chain, you look at new energy vehicle supply chain across the board, China became sort of all of these things converge to make this a priority investment.

Another example, by the way, would be pharmaceuticals, which doesn't get that much attention. But the combination of it being a really important domestic issue, as well as an opportunity for global leadership, means that it's an obvious place for the government to throw its weight. So that's the government side of things. The part that doesn't get as much attention, and Nico, you kind of hinted at this, was the uniquely adaptive and adoptive approach.

entrepreneurs and population. What do I mean by that? And this is where the people first lens comes in. Serena, back to your point before, we did some work to create something called the Lived Change Index.

The LibChange Index is sort of an answer to when I do my work around the world, I'm like, hey, China's changed pretty fast. And people are like, Brooklyn's changed pretty fast. Like Zurich's changed pretty fast. Like what? You know, cool. And I have to be like, no, like this is quantifiably different. A quick example of this. So I was born in 1990, just to show my full hands here.

And the pivot generation in China is typically called the post-90s. It's not millennials. It's not Gen Z. It's 1990 is typically that watermark. From 1990 to today in the United States, our per capita GDP, so the basic quality of life metric, not perfect. It doesn't take into account wealth disparity, but pretty good when you're comparing globally. Our per capita GDP from 1990 to today has increased about 3.5 times. If I'm getting this number right, about 3.5.

In China from 1990 to today, that number is 33x. In India, it's 5x. In Brazil, it's around 2. In Germany, I think it's 1.9. Like the defining characteristic of the environment in China has been its pace of change. And so we typically think about how that changes like the landscape of a city. We very rarely focus on how that impacts the landscape of this generation of entrepreneurs and consumers' minds.

And the message has been adapt, adapt, adapt, or get washed away. So like this is the double-edged sword of this, right? It's not all cotton candy and rainbows. Like it's created some incredible outcomes, but it also means that it's been so brutally competitive here

the last 20 or 30 years, that the entrepreneurial ecosystem is one around hyper iteration, around hyper customization, around needing to sort of swim with the piranhas throughout your entrepreneurial life cycle. And so getting back to companies like BYD,

The need to adapt their offering to meet the needs of both what government was incentivizing as well as what their people were demanding has made them globally competitive. Just the last dovetail here to what I think we might be about to talk about is that global part. Because there's increasingly the belief, and I think BYD really proved this even before DeepSeek, there's increasingly the belief that if you're competitive in China, not that you're exceptional in China,

But if you're competitive in China, you could thrive globally. The consumer ecosystem here is so fierce. Consumers want such incredibly high value that for a company like BYD, just to get by, as soon as you take that product and you put it in a less competitive market, in a less ferocious market, and in a less adaptive and adoptive market, that product can destroy its competition.

And you look at, I mean, just BYD alone, I'm not even talking about other Chinese cars. They have 70% of the market in Brazil. They have 38% in most of Southeast Asia. If you look country by country, it's around 38 to 42%.

In countries like Norway, which I think is 94% new electric vehicle already, they're gaining market share. Countries like Australia, who are more culturally proximate to Western Europe and the US, people love them. They'll never enter the United States, at least not in the near term because of tariffs. So they'll have 0% market share in the US, but they're going to sell 80,000 cars in Mexico maybe this year. That's their goal. It's an interesting world we live in, especially thinking about China's competitive environment as a proving ground for the rest of the world.

To sum this up, you say that the competitive advantage of products coming out of China is not just on the production side where they keep researching and getting better and adapting, but it's also due to the adoptive people who use these products. And do they give feedback by how does that work? How do companies adapt? On what base? So adoptive and incredibly demanding consumers.

By the way, if you ask any Chinese entrepreneur whether they'd rather sell to Americans, the answer is yes, 10 out of 10 at a time. It is so difficult pleasing Chinese consumers. And they have such high standards and there's so many options that it's like capitalism on steroids in a sort of silly way. We don't think of China being that way.

So on one hand, you do have consumers who are much more willing to use products. Mobile payment is a really good example of that. Mobile payment as a technology came out in 2014 in the US with Apple Pay, late 2014 here in China with Alipay. And by 2020, so pre-COVID, which of course nudged adoption, before COVID, you had about 90% user adoption in China, around 27% in the US.

This wasn't a government mandate to use your phone to pay for stuff. They gave banking licenses to Tencent and Alibaba, but there was no government mandate to do this. This was people adopting at scale. The adoptive nature is a part of it. If you look at the last four years, by late 2021, consumer confidence in China took a nosedive.

like this precipitous dip. And I could share the graph. It is not a happy graph. And remember also that this is the first economic downturn that this generation, or really any generation over the last 30 years has lived through in China. The financial crisis didn't happen in China. There was an economic bulwark of stimulus that protected the country. This has been, if we're not using the D word, depression, it has felt like a depression to the average consumer. Like their experience has been that of a depression.

And so the demands for consumer products have been that much higher. It's also accelerated these companies going global.

So before COVID, a company like Tencent, BYD could look primarily domestic for most of their growth. A dampened consumer impulse means that they've had to accelerate their global plans. So ironically, a bad domestic Chinese economy has brought this competition from China to the rest of the world at an accelerated timeline compared to if COVID never happened, if this economic downturn.

haven't happened. There's an iteration point, Serena, that just a last piece here. We talk with people in the drone business about this. So in the US versus China, obviously, like the military implications of drones are really make this an imperative for any large military, US and China being the US and China in that realm. You know, if you're a drone designer at DJI, you walk from the design floor to the factory floor to see your prototypes.

If you're trying to do the same thing in the US, it's like a three-month life cycle. And they're trying to change that and they're obviously trying to change their modes of production. But actually, so I got to ask Elon Musk this at a conference, which before he took his role was a much cooler thing to say in a podcast situation like this. But before he is who he is today, he was who he was before. And we...

One of the things I asked him a question about supply chain specifically, like what about his vulnerabilities in supply chain? This was at, I think it was a Wall Street Journal CEO council back in 2023. And he said, what people underestimate about China is how much hard work they've done to become excellent in manufacturing. And so just thinking you move that to Vietnam, you move that to Mexico, you move that to India, the people are there. The demographic dividend is there. The dynamics are there.

the excellence isn't there yet. And that it's not to take anything away from those countries and those workers and those engineers. It just comes from practice. And China has had decades now of being the world's low, middle and high end manufacturer. And you get good after enough time. Before we started recording, Zach, you cited as one of the core beliefs that you have in your work, this line that culture eats strategy for breakfast.

And in that regard, I wanted to ask about culture and how important you see culture being for innovation in China. Historically, I think sort of the term most associated with Chinese tech firms and internet firms was this 996 culture. So it's like really fast paced, a lot of just like work hours put in. And you referred to some of that in your earlier answers, but

More recently, we've heard more about, especially younger people not wanting to be part of the hamster wheel anymore. There was the lying flat phenomenon. And I was struck also by the fact that DeepSeek, the company that arguably sparked a lot of the conversations we're having right now, did not come from this 996 culture and in many ways had and still has a work culture of,

That's much more similar to pre-Elon Musk turning right wing Silicon Valley. If you want to write to Silicon Valley, but Silicon still tried to pamper their employees and nobody went all founder mode on people. So how important is culture? And do you see changes in culture in China that you think will impact its innovation capacity? So there's this dynamic that I used to always get asked about. Before my current work, I obviously wrote a book called Young China, where we focused on the identity of this young generation.

And there's been this belief that the Chinese education, alongside the government system, would stifle the need for creative innovation. That particularly the Confucian education system, which is much more teacher lectures at student sort of style rather than the...

Maybe liberal arts, back and forth, sort of combustive ideation concept that we have in Western education, or at least that's the good version of either. And I don't think that Chinese education has been radically overhauled yet. China exports a lot of its education needs to the U.S. and Europe. You know, one third of all study abroad students in the U.S. come from China.

And if you look at the last generation of entrepreneurs, many of them had studied abroad, if not all of them. That's a longer conversation, but many of China's best entrepreneurs from the last generation were educated abroad and came back. For this generation, I still don't think where this innovation ecosystem thrives yet is on that zero to one side. So I don't think the having the idea is...

where the Chinese innovation ecosystem shines brightest. I think improving and iterating on the idea at a blistering pace and then creating something that is of a quality that inspires mass adoption is where the innovation ecosystem really thrives.

And I think that's okay. So this is where I have a little bit of a different perspective on this. I was at a semiconductor conference recently, and I put up an image on the screen that was the, I think of it as the innovation impact equation. And the first part of that equation is innovation, right? So innovation times blank equals impact, right?

Like I said, we typically focus on the first one, which is the idea, right? The science, the breakthrough, whatever it is. The truth is, in order for an innovation to achieve impact, you need to have adoption and you need to have adoption at scale.

This is why China is so exciting to consumer brands, because it has a really well aggregated group of people who theoretically have consumer behaviors that are similar enough at a scale that's large enough with a consumer ability that's substantial enough where you could scale things quicker. That plus the competitive environment here. So a highly adoptive population that is competitive.

that expects really high quality products and a highly competitive entrepreneurial ecosystem that's fueled by hard work. So not necessarily just innovation, but also that really what the Chinese education system teaches particularly well. It's not just this, but it certainly encourages this, which is hard work on a level that most... I went to Columbia. I went to public school and then to Columbia and

I go to any middling university in China, and most people are studying harder than the best students I know at Columbia. Again, hard work doesn't equate to genius or innovation necessarily, but particularly on the 1 to 10 side of innovation, mixed with the high expectations of this marketplace, I

Plus the manufacturing capabilities and the talent here. Like that's when you, you know, the product cycle can move so much faster here. And the market is large enough to encourage that, that you get kind of a perfect storm of innovation capability.

So it doesn't look the same as what we've come to expect or associate with quote unquote innovative genius. But when you think about the innovation equation and you measure it in terms of impact, it can still really make that global impact.

Now, quickly on the work culture side, you're exactly right. There's large swaths of the population who are deciding whether or not that 996 culture is worth it, whether that culture of hard work where workers are treated like they're disposable, particularly at the largest tech companies here. And again, this is also the first downturn in the economy. So this is the first time that Alibaba hasn't been hiring. Tencent hasn't been hiring. Pinduoduo hasn't been hiring. And they can really treat their workers poorly and have sort of taken advantage of that.

there's large swaths of the population who are deciding that it's not worth it. What I remind people of is how big do you need your innovation layer to be?

Like how many people in DeepSeek's workforce do you need to make that company hum? How much of a productive workforce? Like how many people do you still need to be as motivated at the levels they were before 2020 to make the innovation economy work at a really high level? Because I think we sort of like the idea that China's gotten lazy and that the youth don't want to work hard anymore. And I always remind people that there are different spectrums of comparison.

Compared to their parents, who was literally called the eat bitter generation in China, right? Eat bitter. If you are above the age of, what is it, 60, you have survived a famine that killed 45 million people. Most, you know, the boomer generation in China

was extraordinarily uniquely hardworking. And you could credit them with China's initial economic miracle in the 90s and early 2000s. Compared to their parents and their grandparents, this young generation is not hardworking, full stop. Compared to their peer generations around the world, that's a different spectrum of comparison. And that level of hardworking is still

certainly intact. But again, in innovation, you're not just comparing hard work. So hard work is only part of it. I do think this, the lying flat thing is real. And it's this sort of beautiful, silent rebellion against the really toxic culture of competition in the workplace in China. Absolutely real.

And there are still a large number of the population who are really driven to have great jobs, make more money and make an impact. One part of the population that has felt it, have felt the squeeze this last 36 months, let's call it four years, is the entrepreneur layer. So DeepSeek is an exception to this, but it's much harder to raise money in China now than it was before COVID.

The capital markets have come to a stop more or less, unless you have a product that you're taking global or an AI product. And so the money that's available to them is typically from what's called a government guidance fund, which is city by city. They have their own KPIs. I mean, it's not as pro-entrepreneur as it was in like 2017, 2018, which are really exciting pro-entrepreneur years. With the DeepSeek and its founder, Liang Wenfeng and

We also see Unitary with Wang Xingxing. These are the young generation of entrepreneurs that you're talking about, post-90s generation.

How do they differ? Do you see different approaches to other big, rather big tech companies who have been successful in these earlier days? They're thinking global much earlier in their life cycle because they've had to. Tencent and Alibaba, right? They built their companies on the Chinese economy. Even Pinduoduo, when Alibaba and Jingdong were moving upmarket, Pinduoduo basically...

that surfaced 50% of the consumer economy who had not been able to participate in consumption yet. They created this incredible domestic market primarily. What changed in 2018, 2019 is that no longer was enough. And so the next generation... And by the way, Alibaba and Tencent have more or less failed to go global. Alibaba in a lot of ways, it's really disappointing because they're... You could even... I don't want to say the death now, but certainly the...

the signal that put the markets to sleep and put people on watch towards China was the failure of the, and financial to go public. Like,

Like that was sort of the signal like, oh man, things are different now. But Tencent, I mean, WeChat is arguably the best communications app in the world and has failed to make a global impact beyond Chinese tourists in different towns. This next generation is thinking global much earlier. DeepSeek in many ways, I mean, if you think about the complexity of being a China developed product in the AI world with a product that can be used globally, right?

particularly with people's expectations towards the data ecosystem here and government interceding in that. They didn't completely sidestep it, right? Everyone's favorite thing was to look up sort of contentious political, you know, things that you can't say in China on DeepSeek and to see what it would tell you and follow its thought process. Like that was fun to do and everyone did that for a while and it's certainly worth consideration. But because they're open source, right?

which is something that really harkens back to the golden days of tech utopia thinking, that the world is going to become better, the pie is going to get bigger. Sharing this is a virtue, it's a right. The fact that they took that approach in creating what they created...

and are now sort of in the sort of foundational DNA of a number of companies around the world. Again, not just in the US and Western Europe, I think that's where we think first, but much of what China builds for its domestic economy isn't a very good fit for Western Europe and North America. I think DeepSeek might be the exception to that just because it's kind of good anywhere.

But if you look at products like BYD, or something much more mundane, like there's Dyson hair dryer competitors here. I know somebody here who runs a consumer fund who's really focused on consumer goods in the bathroom. That's it.

But because it's so competitive in China, you know, everyone has a bathroom. Everyone dries their hair for the most part. They have built these like incredible hair dryers, which sounds like a ridiculous thing to bring up on an innovation podcast. But if you look at how hair, like the best hair dryers are priced in Western markets, they're out of reach for 99% of the world.

And because China is the world's middle class, right? GDP per capita of around $13,000. What's built for somebody in Chongqing is much more likely to be a great fit for somebody in Rio de Janeiro or Mexico City or Lagos or Kuala Lumpur, right? And that sort of thesis has proven out really well for particularly consumer products. So if you get back to deep sea, something that you don't have to pay for, something that is open source...

If you're an entrepreneur in much of the world who has fewer resources to try to make great impact, I mean, it's a phenomenal option. Like the route that they took in approaching their global launch, not their domestic launch,

is so different than the last generation of Chinese entrepreneurs who would hardly have had a global launch, if at all. I would like to return to Chinese citizens. How do they perceive this deep-seek moment or that China is back? You mentioned the pessimism of the last few years and the consumer behavior, which was bad. Has this kind of changed? And do they also perceive it, especially in the tech space, as this kind of large-scale competition? And is there a sense of pride there?

Or do they even care? So the deep seek moment was mostly a moment for people not in China. So I want to be clear on that. Like the up and down of China's sentiment is far more radical than what people feel on the ground here. So I want to sort of separate a few different groups.

For most people here, the deep-seek moment was certainly one of pride, but there wasn't the radical pendulum shift from deep pessimism to surprising optimism. Remember, this is also during Trump. And so that made a lot of the world more open to the idea that there was some

competition and other options that should be considered around the world. After four years of really not considering that from China. I think the people who have felt it maybe the most are certainly investors here, but also companies. Again, capital markets haven't been willing to consider China since COVID. Investors have come, it's really starting in like 2023, but they haven't opened their wallets. They're excited by valuations that feel like they're tamped down, but they're certainly worried about geopolitical risk and regulatory risk.

And then if you work at a global organization here, there hasn't been much good news about China in the last three or four years.

So for those people who are bridges, who work in between China and the world, they have had four years of being on the receiving end of negative sentiment, which most people don't know what that feels like, but just a constant negative sentiment. And so the biggest shift for people is in the last three months, suddenly there's been optimism and they have been receiving, they have on the receiving end of more curiosity, more optimism, more interest, more nuance, more questions than they've had since...

December of 2019. Amazing. Thank you very much, Zach, for being here. Thank you so much for having me. It was a real, real joy. Thank you. From Shanghai, that was Zach Dijkspold, founder and CEO of Young China Group in conversation with my Asia Society Switzerland colleagues, Nico Luchsinger and Serena Jung. We'll be back with more soon on the podcast, so be sure to subscribe to State of Asia in your favorite podcast app to not miss out.

For now, my name is Rem Kotanis. Thanks very much for listening.