Travels in China

I just returned from a three-week trip to China, part of it spent taking Chinese language classes in Shanghai on my own, and part of it spent traveling around Nanjing, Suzhou and Hangzhou with my parents.

Travel is interesting in that it frequently evokes seemingly deep, almost religious convictions among its participants. An investor will spend a few cursory days touring a new country, then commit half their portfolio to previously “undiscovered” companies in this new locale, believing that they have a unique, first-hand cultural insight. Others will have spiritual awakenings and find love. The more exotic the culture, the more profound the epiphany.

I’m someone who has worked in the travel industry for a long time, so I don’t say this completely facetiously. I unreservedly love to travel, and genuinely believe that it can bring out the best in people. But I’m also reminded of the phrase “a little knowledge is a dangerous thing.”

A few years ago, a guy got into an argument with my wife about what qualified as the “best” sushi in Tokyo. The guy was from the East Coast, recently watched Jiro Dreams of Sushi, and had just visited Japan for the first time. My wife is Japanese, speaks Japanese, spent part of her schooling in Tokyo, and still has many close friends and family members in Tokyo. We have also visited Tokyo 1-2x / year for the past ~20 years.

My wife is very non-confrontational, and tried to politely suggest that there might be other places better than the one most recently documented, in English, on Netflix. Yet he found this suggestion unfathomable, insulting even, and felt compelled to loudly pontificate on why this could not be so. His brief, exotic Oriental¹ adventure had fully convinced him that he was now an expert on an entire culture’s cuisine.

In contrast, the more time I spent in China, the more I realized how vast my ignorance is, especially when it comes to business and investing.

For instance, the CFO of Starbucks recently said that “Today, we still are #1 choice for the Chinese consumer in terms of away-from-home coffee and freshly made beverages, which gives us a leadership position.” This is a strong statement, and it seemed plausible to me that Starbucks would be able to continue growing in China. After all, Starbucks has a strong brand and a proven playbook for growth internationally, and they already had some success in China - what could go wrong?

After a few mornings in Shanghai spent trying to get my caffeine fix, it became clear that lots could go wrong. While Starbucks might be the “#1 choice for the Chinese consumer” right now, the competition is fierce. There were a multitude of amazing, independent coffee shops and also a popular chain, Manner Coffee, that was superior to Starbucks in all respects.

In Nanjing, I tried to order a drink at Manner Coffee and was told that the wait would be an hour long! They simply had too many takeaway orders at the moment, and the staff were clearly struggling to keep up with the torrid demand. I walked across the street to an empty Starbucks to get an inferior drink that was 50% more expensive. I have nothing against Starbucks, but it’s clear that their model in China is under threat.

Similarly, I was shocked with the plethora of electric vehicles in Shanghai. Most of them were from Chinese brands that I had never heard of, yet the quality of the vehicles seemed high and comparable, if not better, than the Tesla I own. Tesla’s continued growth in China is far from assured.

One night, I was chatting with a bartender who had recently bought a new Nio. He said he never had to charge it, because there were thousands of charging stations around Shanghai, where an automated machine would swap his battery with a fresh one in under 3 minutes. He was also part of a WeChat group with Nio employees, and claimed that if he didn’t have time to pick up his kid from school a Nio employee would do it for him - this “concierge” service was a perk of owning his car.

When investing internationally, I think it’s tempting to believe that there are convenient analogues for American businesses. Baidu is the “Google of China.” Didi is the “Uber of China.” Shopee is the “Amazon of Southeast Asia.” I’ve been guilty of making the same mistake.

The reality is often much more complicated, and there are cultural nuances that simply don’t translate. This seems like a basic fact not worth mentioning, but in an increasingly globalized world it is easy to forget.

When I told my (younger and much cooler) Chinese language teachers that I used Baidu maps for navigation (my analogue for Google Maps), all of them laughed and said they had never used Baidu maps before. They mentioned a few other apps I had never heard of. They also said it was often cheaper to order delivery than to dine in at a restaurant, and that they never ate at a restaurant unless they were offered a digital coupon. Many of the business models and consumer behaviors that I saw were completely incomprehensible to me.

I was also amazed with how “nice” everything was in general - the infrastructure, buildings, cars, amenities, restaurants, shopping, etc. I thought that once I left Shanghai, it would feel like I was in some third-world country with crumbling, abandoned buildings, dirt roads and stray dogs (even though I’ve been to China a few times, I’ve never strayed far from the big tourist cities popular with Westerners). Instead, from outward appearances, I could have been anywhere in Japan or America. The high speed train from Shanghai to Nanjing had the nicest seat I’ve ever seen (fully lie-flat!) Hangzhou, a metropolis of 12 million that many people in the West have probably never heard of, was one of the prettiest big cities I’ve ever seen.

If I’ve learned anything in my time investing, it is that it requires a lot of humility. It’s easy to delude yourself into thinking that you know more than everybody else, that you have a unique edge, based on a mere fragment of understanding. This is doubly true for foreign markets, where it is also easy to fall prey to false analogies, existing prejudices and reductionist thinking.

A little knowledge can indeed be a dangerous thing.

1. Can I use this term as a half-Asian, or will I be canceled? I use it specifically because it so perfectly encapsulates the manner in which he described his trip and his attitude of cultural superiority. No doubt it will be taken completely out of context one day, perhaps if I ever run for public office.