Thread by @lillianmli

1) I spoke with the China-focused portfolio manager of a $90bn AUM fund.

Mike Tian of WCM thinks Chinese tech who focuses on asset and operationally heavy businesses are more attractive investments then than asset-light businesses.

Counterintuitive, but here's why:

2) The conventional thinking is for internet companies to be 'Light': asset-light, people light, outsource all the ‘grunt work’ to the ecosystem, focus on ‘platform’, earn high margins and high returns on capital.

Mike thinks this might be a mistake

3) With heavier operational and asset business, while the initial outlay is higher, there’s also a chance of cultivating a wider moat. Especially true in China as big internet businesses are cross-vertical ecosystems, and barriers of entry for light businesses are very low.

4) In hyper-competitive China, every ‘Light’ business can go from a product to a feature, just like Livestreaming.

However, as Mike points out, barring technology disruption or significant regulatory change, this is not the case for food delivery or home brokerage.

5) Meituan is famed for its field execution. Beike, the real estate platform have their own directly managed stores with 30-40K operational people involving in management of their franchised model (aka Agent Cooperation Network)

6) Even a large reason for Douyin’s success is its heavy on the ground team to cultivate influencers, designing viral dance moves, etc. These capabilities sound easy, but Tencent/Kuaishou still haven’t been able to replicate in style

7) The playbook is to use 'Heavy' sectors as a loss leader wedge to cut into 'Light' sectors with better margins. Meituan did this with hotel booking and overtook Ctrip. Mike thinks 'Heavy' businesses should not lose their competitive advantages in pursuit of 'Light' businesses

8) The 'Light' margins are a byproduct of the 'Heavy' business units. In fact, going from 'Heavy' to another 'Heavy' vertical might be a smart way to further build the moat.

However, being a 'Heavy' business is a mindset and corporate culture.

9) The Chinese internet is becoming 'Heavier'. You see this in almost every vertical. Mike's advice to both Western and Chinese internet companies would be 'Embrace heaviness. Use it to create better customer experiences and competitive differentiation.’

10) In terms of the mindset differences between 'Light' v 'Heavy' businesses. It’s the difference in a world view where one focuses on framing problems in terms of software and the other embraces the burden of an operationally complex organization

11) Heavy businesses are still engineering-focused, but they also realize that customer value depends on controlling the entire ‘end to end experience’.

For Mike, operational expertise is a source of competitive differentiation and a source of value creation in its own right.

12) In China internet, this 'Heavy' mindset is prominent in companies like Meituan, JD, and Beike.
Sometimes, the culture is not created deliberately, but rather because of past experience and history.

13) Success for 'Heavy' platforms comes from consistently executing on small things. None of it is really rocket science, but it’s not easy to create that consistency across thousands of supplier and customer touchpoints.

14) Do this consistently, one can build brand reputation and hard moat sources around CAC, customer loyalty, supplier network, scale efficiency

15) 'Heavy' businesses don’t think of business as simply a ‘software problem’ that can be solved with good UX, algorithms and plenty of traffic.

They realise it’s more complicated than that.

16) WCM is recruiting a generalist China analyst for their team. If you are passionate about doing deep fundamental research in China and want to do it as a part of a tight-knit, collaborative, and slightly irreverent team - go here linkedin.com/jobs/view/2395…

For more information about Mike's 'Heavy' vs 'Light' business philosophies and WCM lillianli.substack.com/p/heavy-versus…