Karabell: These are designed to be more conversational rather than presentational, hence there’s no multimedia and obviously smaller groups. We’re just going to plunge right in. Imran Khan, who is listed on the schedule, from Credit Suisse, I’m told wasn’t going to be here and now may have kind of come in the end, so if he does he does, and if he doesn’t he doesn’t. If any of you have really passionate views about Alibaba, it’s a public valuation, he’s probably the guy to talk to.

On my right is Misha Piskor—

Piskorski: Piskorski.

Karabell: It’s just terrible.

Piskorski: No, no, this is a very easy Polish name. On a scale of Polish names this is not bad.

Karabell: That’s what I was thinking to myself, and yet I still managed to mangle it so I apologize about that—who’s recently moved to Switzerland for INSEAD after 20 years at Harvard. And Gary Rieschel who I’ve met a bunch of times and has been doing deals and venture in China for 15, 20 years?

Rieschel: Just about.

Karabell: and lives in…?

Rieschel: Shanghai.

Karabell: We’re just going to have a discussion. I think Misha’s going to kick us off with an overview or just a quick, “Here’s what’s going on in the wonderful wild world of China and Internet in size and scope.” My background, by the way, is in investment funds in Chinese and U.S. companies for about 2002-2008. I wrote a book called “Super Fusion” about the Chinese and U.S. economies coming together as one fluid system in spite of all the political, social, and other issues and differences. And obviously it’s an at least symbolically good time to be talking about this given that President Obama has, understandably, fled Washington for the more welcoming and easy to navigate environment of China to discuss U.S. and China relations with President Xi Jinping. I think he’s still there today. They’re ongoing. So with that, Misha.

Piskorski: I just want to start off by asking you what percentage of global Internet users are in China. What do you think?

Karabell: I wonder what the answer to that question is.

Piskorski: Does anybody know? You want to guess?

Rieschel: Twenty-five.

Piskorski: Yes. It’s probably like 27 now. It used to be, this is amazing, because you just scroll back a couple years and obviously China wasn’t on the Internet map, but now it’s—and it’s growing. It’s only something like 50 percent of the Chinese population is actually online. There’s still incredible opportunities for growth. I think they’re just past 600 million Internet users and we’re all expecting by 2017 to add 900 which will make it a powerhouse. The only, second biggest powerhouse which is going to be India of course, but China’s got a huge start on developing this.

I actually wrote a book about the American Internet environment, but I put the book down and I was like, all right I’m going to go to China now and write the book about the real Internet, because that’s where it’s happening. I think what’s really amazing about the role of the Internet in China is just how much time people spend on the Internet there. I think December 2013 was the first year in the United States where we actually ended up spending more time on the Internet than watching television. The growth in mobile devices made us actually spend about 4.5 hours a day on the Internet, which is how much we spend watching TV. That crossover occurred in 2010 in China. So, really people are spending a lot of time there.

When you think about the structure of the Internet, I think it’s obviously very critical, how protected it is. I think it’s sort of a unique feature that makes it into a maze that basically relies on homegrown talent. The talent is pretty impressive, pretty amazing. We’ll talk a little bit later about the economics of some of these firms. But I think one huge distinguishing feature of Chinese Internet is that there is, as you know, no IP protection. If I developed a feature, or if I have something that I’ve added to my chat program, you’ll probably have it tomorrow. The war is not basically generated on the basis of what features you have, but what distribution system you have. Given that so many people are still yet to join the Internet in China, I think in a lot of companies there—a lot of Internet companies are spending time thinking about, “How do I win?” I think the war is not won in China yet, so I think we have two giants there, Tencent and Ali, but they both know that a war hasn’t been won. I think the best example of that is a company, some of you might know, called Qihoo, and they were the Norton antivirus company in China and yet, in the short period of four months they actually shot up to be about 15 percent of the market share when it comes to search. The way they did that is they basically converted traffic from people who were downloading the antivirus software onto basically their search engine, and how were they able to do that? These were mainly new users who were joining the Internet so they had no established preferences for search engines. So, if you grab them quickly with this smart distribution strategy you could actually convert them into customers and grow in ways that it would be impossible to believe that suddenly somebody would come in and within four months would grab share from Google. So in some ways China has gone a long way but because we haven’t finished the influx of Chinese people, I think there is still a lot of changes that can happen. Since everything is about distribution in China, I think we can actually see some really fascinating stories come out of that. I’ll stop with these basic ones and shoot over to you guys.

Karabell: And maybe Gary, talk a little about the deals and the economics. Do you have the same dynamics of things going mobile yet, mobile Internet? Who’s paying for content? We had a panel today, a media scrum just talking about the disruption in the American media environment because of Internet and content, and who’s paying, and it’s free, and advertising, and all this is kind of—there wasn’t necessarily an industry to disrupt in China around all these things. I wonder what you’re seeing.

Rieschel: I think that’s a really interesting point. China has had one major leapfrog, which was never really focusing on fixed line infrastructure and going to mobile. What that’s done is there are—you hear large numbers, the small one is about 700 million people with mobile access, the high end is about 900 million people. About 80 percent of the people with mobile access now access the Internet through mobile devices. It’s by far the largest mobile data market in the world, by two to three times anyone else. That simply is because it’s all driven by need. Innovation, nothing ever happens in innovation unless there’s some need. There has to be a pain point. Obviously when you didn’t have a physical phone line and the mobile services became available, that was a pain point that caused the mobile infrastructure in China to leapfrog. It was something they could get ahead of, much faster deployment. You’ve seen this same thing in Africa, you’ll see the same thing in India.

I think that what’s really happening at the core of the Internet in China and how that’s going to evolve from here is—we talked a little about the channel, but part of what the Internet is doing is eliminating a great deal of the channel and there’s some pretty profound implications for this outside of China. When we first started doing this—my firm Qiming, we do investments just in China, and let’s say in round numbers, we have 100 portfolio companies. When we started in 2005, for the first six, seven years, we really didn’t see a lot of innovation in China that was unique. You’d see a lot of things that were copied from the U.S. That goes back to the point about intellectual property protection. I’m not sure there’s a lot of intellectual property protection on the ideas in the U.S. Internet either, but that’s a different discussion.

What’s changed in the last three years is about half the companies we fund now were doing something you can’t find anywhere else in the world. Whether that’s medical devices, as we have a huge healthcare practice, or whether its things on the Internet. Whether it’s in payment systems, whether it’s in Internet banking, there are services and technologies being offered that really don’t exist anywhere else. That’s a trend that is going to take some folks in the U.S. by surprise. When Alibaba went public and was suddenly worth $200 billion some people in Silicon Valley seemed surprised, and it’s because of the insularity of the U.S. market. The history has been if you were the largest player in the U.S. and you went overseas, you were usually the largest player in the world. That’s not the case anymore. When you go overseas and you’re fighting in Southeast Asia and you’re Facebook, you go down there and find out that WhatsApp is one-sixth as popular as WeChat from Tencent. When you start to look at e-commerce—if Amazon looks at e-commerce in India because the limitations on physical infrastructure, you’ll have a huge debate over whether or not the Alibaba model for e-commerce in India will actually be stronger than what Amazon’s doing. It’s the first time that a lot of leading technology companies, when they leave their home shores, run into another player from another market that is at the same scale or larger. That’s a big change.

I think one of the other things I would simply talk about to be a little provocative is: a couple of companies in China, you have to be very careful in dealing with them in terms of where they’re going to be taking things. Tencent is grossly underestimated. Alibaba is much more popular, Tencent is much better run. If you want to look at a company that has a very, very large profound impact as it goes overseas—Tencent. Tencent’s model is very asset light, it has WeChat, various chat services, and that service is simply better than WhatsApp. If you look at everyone who has both, the vast majority of their use winds up being on WeChat. So, it’s not going to be an easy company to suddenly eliminate in the social networking and media space. Another company is Xiaomi. Xiaomi is famous now because they make handsets. It’s the third largest handset company in the world. Lenovo would argue that it’s actually four, so they go back and forth. That’s okay. One of the things that they are doing though that is really going to be disruptive—and it’s the most disruptive company I’ve ever see in 18 years of doing this as a venture capitalist—is they have 20 projects internally where they take relatively high gross marginal electronic products and what they do, just like here, people have leveraged Amazon Web services or Microsoft Web services to have, what is called, a more efficient startup, to get startups into the market quicker, faster, and cheaper. What Xiaomi’s doing is taking their supply chain of a company that is going to sell 65 million handsets this year and they’ll launch a project, they’ll bring a team together, and they go to suppliers, and they say, “Treat this idea as if it’s us.” Think about that. A startup for a new electronics company suddenly has the buying power of a company with billions of dollars in revenue. What that does is it immediately drops their costs of goods substantially. On the back end Xiaomi’s cost of sales in the last quarter was 3.4 or 3.5 percent. How do you compete? If you’re competing, all of a sudden you’re competing with a startup that has the same buying power as a multibillion dollar company and they have the most efficient distribution channel on the planet, the implications for this, for anyone dealing with consumer electronic products is pretty interesting.

Piskorski: I actually want to pick up on something that you said around the uniqueness. In some ways I think one of the reasons why this uniqueness comes about is you see the things that we don’t see. The actual underlying economic structure of China is very different. China still has bazillion inefficiencies even though the state has sort of withdrawn from managing the economy quite a lot. You think about distribution systems being very poor in China, Walmart still has a tiny percentage of what’s being sold. You think about advertising markets. Advertising markets are some of the most expensive advertising in the world because the state controls the advertising. So, literally you can deliver a message to 1 percent population India and probably only with the same amount of money, would cover 1 percent of Shanghai. It’s really, really expensive. I think a lot of these innovations for these startups are coming from the fact that the underlying world is really, really inefficient. But what really stuns me is what happens to big overseas companies, multinationals that come to China, because they, like everybody else run into the same problems. I was in China last year for a very long period of time doing research and I would actually run into a bunch of these different companies that said, “Misha, the strategy that we have that works everywhere else in the world doesn’t work in China because the things that you need for this strategy to work are simply not there. So, we were forced to innovate our actual business model around the Internet. We went to Ali, we went to Tencent to help us out. We went on Sina Weibo to do the marketing there. We recruited key opinion leaders and influencers online to get our product going and so forth, and we revised our system.” I think one of the most interesting cases, you probably heard about them because they’re actually out of Shanghai is, Durex, the maker of condoms. If you can get Chinese people to talk about condoms online I think you’ve sort of stumbled upon something really big and actually grow market share and be really successful with that. What you’re seeing now is they suddenly realize “Oh, wait a second. We can actually revive our own state strategy that we’ve been using globally on the basis of what we’ve learned in China. Because there was no need for us to innovate with our strategy because we were sort of comfortably just running it across the globe and now we’re figuring out actually the most efficient strategy is the one that we developed in China so we’re just going to import it back into the U.K. even,” which is where they come from. I think that is what was really surprising people is the business model in exportation from China.

Rieschel: I think the challenge for the West, the challenge for the more established traditional firms is again, there are now options, so exactly what you were just saying, a firm could do that themselves and then bring that model back from China somewhere else and it’ll have some economic impact, hiring impact, whatever it is within the company. The other side of it is when you go overseas and the U.S. firm, let’s say they’ve decided not to really focus on China, they’re going to South Africa, they’re going to Nigeria, they’re going to Latin America, they’re going to India, Indonesia. Now what they’re going to run into is a different choice because the people in that market say, “Actually for our market, what China offers is better. What the Chinese firms offer is a better choice than the U.S. firms.” Because the U.S. model is based on a relatively high level of trust, high level of rule of law. China’s models are based on ambiguity and overcoming inefficiencies. What is the developing world? Sorry, it’s very ambiguous. It’s very inefficient. So, firms that have been successful in China are going to have a disproportionate advantage taking that model into most the other major growth markets in the world. The next 3 billion people that come online, the majority are going to be in the developing markets. That’s something where the Chinese firms or the firms to your point, the firms that understand how to be successful in China, they’re going to be able to offer both models. That’s going to be profoundly valuable.

One other thing. We really get paid for dealing with ambiguity. If you’re successful in China, you’re very good at dealing with ambiguity. America does not really reward you, you don’t need to be great to deal with ambiguity in the U.K., America, etcetera. In China you better be pretty damn good at that.

Karabell: Quite the contrary, Americans and American businesses seem to have a chemical aversion to uncertainty, or at least like to claim that they do as opposed to embracing this aspect of doing business. I want to ask both of you a little bit about the nature of e-commerce in that, so much the of the driver of much of what people talk about in this conference is predicated in the U.S., and Europe, and elsewhere on payment systems that people are recently willing to engage in online. One of the huge advantages that Alibaba has, or has had is developing this whole Alipay system of getting people to actually spend money online. It used to be you had Internet businesses and Internet things in China that were just—

We have this incredibly persistent fly here. It’s here, there. I think it’s a CCP little bug [LAUGHS].

—that used to be like Ctrips. Ctrip is kind of like Expedia-ish, but when Ctrip started, it called itself Ctrip.com it was just kind of an occasionally mobile, sometimes Internet way of people getting people to call call centers on the phone or then just walking into a Ctrip office. It wasn’t really transactional. How’s that changing now? Are people—this is a morphing thing. It used to be that most people in China were not comfortable providing financial information online, and/or there wasn’t a banking system that made it particularly easy to actually, literally, get your money from a bank if you had a bank account to mobile payment systems. I don’t know what you’re seeing in terms of that, but that’s a really crucial element.

Piskorski: The first thing that comes to my mind is that if you compare the percentage of all retail that’s now purchased online in China, it’s ridiculous. It’s like 2.5 percent of here. I think last year was the first year where the Chinese actually spent more money online than Americans did even though the average Chinese person is probably has income that’s 10 percent of ours. That would only work if there is a payment system that works.

Rieschel: Two things. One thing about Alibaba, a lot of people don’t understand, at least in my opinion, why Alibaba’s been successful. When they launched Taobao at the end of 2003 customers were not happy after the first year. The reason was the logistics infrastructure, the payment infrastructure, all these things really were poor. The customers were not happy. They weren’t happier with eBay, but that was for a couple different reasons. What Alibaba did was they went right to the heart of the matter which were the couriers and they went to the couriers and said, “If you want to pick up from our Alibaba you have to guarantee you’ll pick up within 24 hours of receiving our notice. You’ll deliver within 48 hours of receiving the goods and you’ll wait at least 30 minutes for people to try something on. You’ll be able to handle cash on delivery.” They basically did what FedEx and UPS did over 20 years here. They created terms of service for e-commerce that had become more trusted in China than traditional retail. Think about that. It’s an extraordinary statement, in an almost zero trust society. They were able to establish a trust infrastructure around logistics and payments that had escaped virtually anyone else. That at their core is what allows Alibaba to do what Alibaba does. Alipay was a nice add-on because it allowed them to save money, then they launched the banking business. Tencent and Alibaba both launched payment and banking infrastructures. But it was the ability to actually go in and dictate to an entire market the terms of service for e-commerce then. Those are Alibaba’s terms. When you get to write the terms, you better do well because you don’t really have any excuse. It was an extraordinary opportunity that they were able to take advantage.

Piskorski: In fact right now there’s something like 150, 160 Chinese cities where you can actually get stuff delivered to you the same day. I’ve done this and it’s like a dude comes on a little motor bike and says, “Here.”

Rieschel: And they don’t need drones.

Piskorski: Right, they don’t need drones. In fact for the amount of money that’s been invested into developing this system far outweighs everything else that Alibaba’s invested in.

Karabell: Let’s talk a little about also the role of government. I mean just because it ends up being a focus, certainly a focus in China, it’s probably an excessive focus for people who aren’t in China, about what the role of government is and somehow we are always—and this is my own color shining through here which you’ll just have to deal with—We’re always deeply focused on the role of other governments and their complications in what they do far more than we focus on the role of our own, although that may have changed in the past couple of years with NSA and Snowden et al. But it has always been a kind of Western or foreign businesses trying to interact in China, the role of government particularly in terms of online, whether it’s surveillance, or just setting the rules of exchange. Again, another thing that Obama has been on the news today relevant to this is obviously is coming out with Internet neutrality and carriers. I don’t actually know what the equivalent to any of this is for China Mobile, for whoever is keeping the pipes in China, but maybe you both can talk a little about that particular part of navigating the maze.

Rieschel: The government’s side in the—It’s often mentioned people have an impression that China is a central planned economy. Nothing could be further from the truth. I think that actually gets in the way of a lot of intelligent U.S., particularly, U.S. interaction, and the Western interaction with China. One of the things you have to realize is, if you go back to the time when Deng Xiaoping started to liberalize the economy in 1979, Zachary’s written quite a bit about this, something like 90+ percent of the jobs created since that time are in private enterprise. All profit growth in the last five years is in private enterprise. This is an economy that has a lot of state-owned actors, but all the energy and juice in that economy is coming from the private sector. That’s not something that’s understood or appreciated enough. So, when you deal with China you’re dealing with, there are some very bright people, the technocrats in Beijing are really quite good, but they don’t really get to call the shots in all the provinces. Inter-province trade is more awkward than many of the interstate trading, things that we take for granted here. In terms of who actually gets to call the shots at a policy level, the big state-owned hospitals in China, if you look at a local hospital in Shanghai, the Shanghai government actually controls what happens in that hospital. When that hospital wants to merge with a hospital in Beijing you don’t have an economic discussion. You have a discussion between the political person in Beijing discussing with the political person in Shanghai what the merger terms should be. I’ve decided my life’s too short to actually participate in much of that because our one or two tries of doing roll-ups involving anything of government ownership has just been a complete mess. So, it’s not that at the local level the inefficiencies is in China’s government probably mirror our own. At the central, the policies are not bad, but by the time they’re filtered down to the local implementation it becomes much more of a challenge. E-commerce has been left relatively unscathed. It’s remarkable how they’ve left their hands off of that. In fact, if you think about—for all the centralized control issues that Xi Jinping appears to be exercising what in the last two years has been the most surprising to me is letting Alibaba and Tencent go after the Chinese banks. Allowing them to get banking licenses and open up online banks. That is a huge message to the large banks saying, “You are not doing a very good job.” Because they just took two of the most rapacious competitors in China and turned them loose on China Construction Bank, the Agricultural Bank of China, and Bank of China. Now you’re up to the point, you’re almost three quarters of a trillion dollars’ worth of deposits in those two institutions in two years.

Karabell: Is that another example of—there has been particularly in the past 20 years a kind of tendency in multiple industries of rather than trying to knock down a sclerotic industry, allowing a new one to grow up beside it with the hopes that it will become mature enough quickly enough that the inevitable collapse of an older model happens just after there’s a new path. It’s like building a new bridge next to the old bridge knowing that the old bridge is going to fall down and hoping the new bridge is done in time so that you can shove the traffic that way. Do you feel like that’s kind of going—because banking system has been a non-reformed aspect just because the consequences of it, the bad loans and all that, maybe this is yet another—

Piskorski: To the credit of the big Chinese banks where do they show up next? They show up at business schools for executive education. They’re actually taking this really seriously. I mean there was a huge wakeup call. In fact I just taught two out of those three so there is definitely a kick there. There’s two other comments that are super relevant about the state and the Internet. The first thing is China Unicom and China Mobile are actually state-owned enterprises. They have a very clear mandate to cover the country with 3G and 4G coverage. It’s stunning how often in the U.S. you run out of coverage. It’s stunning how rarely you run out of coverage even in the most remote parts of China. You still will have some 3G signal which you couldn’t get anywhere else. I think that’s a political thing how the investments get done. The other part of course that’s particularly widely talked about here in the U.S. about the state and the Internet in China is the issue of censorship. It’s just stunning how relatively little of, sort of a mind share, for example, a Chinese person’s censorship takes place. I’ve often, in my interviews with people there, heard things like, just make sure you don’t write things like, “Let’s meet together on Tiananmen Square.” Everybody knows not to write that. That’s not a good idea. That will be edited out and censored. But everything else people feel very free to talk about or they will use slang and made up words. There’s this sort of whole Internet dictionary that’s been developed. It’s so powerful in fact that it migrated from online to offline. People will actually make references to these idiomatic things that have developed on the Internet that are basically designed to overcome the system of censorship in China.

Rieschel: The best examples are Apec Blue. One of the great lines now is the Apec Blue line which refers to the air in Beijing miraculously becoming blue two days before the Apec Summit starts. All it took was telling several million people in Beijing they get an extra six-day holiday so they all left town, they literally shut the government for six days. The shut factories, they shut—you’ve got to admire the ability to do that. It’s really pretty cool the fact that they can do that. But online there was immediately, there was this open discussion and then the censors slammed it. So, they came up with the term Apec Blue and everyone knows that means false blue sky. Everyone knows that it means, “This is bullshit.” Oh sorry, we’re on camera. “This is bullshit. We’re never going to windup—this isn’t sustainable.” But it’s really clever. Then everything with—everything is associated with—there must be 100 different catches of phrase for the Tiananmen. Every year when the anniversary comes up the censors do get a hold of the ones from last year, but there’s a whole new wave every year of terminology around this. The creativity is quite unusual.

Piskorski: We talked about it a little bit. This is part of the beauty of the Chinese language actually, that you can, some people here can speak Chinese so you can talk about it. But the famous example is the river crab example which has been around for a very long time which comes out of the Chinese word “to censor,” which is in Chinese is harmonized with accents going up, but if you change the accent on one of those words to be downward sloping it becomes “a river crab.” There’s all this discussion about the river crabs. I remember when I was doing some analysis about what people talk about I was like, “This does not make sense.” And somebody said, “Here is a dictionary. Here’s what people really mean.” Because again, there was all this sort of aquatic talk and I’m like, “I have no idea what these people are talking about.” It’s sort of quite stunning. It gets pronounced almost exactly the same, but it’s written in a very different manner, but average Chinese people, when they see this they like, “Yes, I get it. It’s very simple.” So, it’s actually quite amazing how—actually to me in some ways it was not surprising at all. I actually grew up in Communist Poland when Walesa was trying to get rid of communism. When you pick up a phone back in those days, before you picked up the phone we’re like, “Before you dial the number, make sure that you know that this call is registered.” The calls were recorded so we developed a highly sophisticated systems of actually communicating what we wanted to say.

Rieschel: That’s that “need” comment, right? None of this happens unless there’s a need for it, but people are quite creative. I think the big themes we’ve seen over the last 10 years in Qiming is, the Chinese, however much the government may want to in some ways hold back technology, they cannot. Anything you see happening in the U.S., anything you see about automation, anything you see about the issues about jobs here, what are going to be the jobs of the future, efficiencies, as we’ve talked about, and distribution of efficiencies and services, all those technologies here are going to move into China and they’re either going to create some of the same problems or some of the same opportunities for the Chinese. You can’t hold the technology back. It’s simply going to flow where it’s going to flow. But the other part is the Chinese are going to take that technology and then they’re going to take it somewhere else. It’s really important to understand that when that goes over to China and when it leaves China it may very well be the same, but it may also very well be very different. It could wind up being much more efficient and it can wind up being quite disruptive in a variety of different markets.

Tencent has just invested a very large amount of money in low earth satellites to study crop conditions, to determine when crops need more water, when crops need more nutrients. They did this deal in Brazil. Ali, Tencent, and Baidu have done 137 investments in Silicon Valley in the last two years. Make no mistake. They’re not going away. I think they’ll learn and—it’s like holding back technology, you can’t really do that so you have to be on the side of how you would adapt it to your benefits. I think either as investors or as business people there is going to be a wave of Chinese traveling overseas. They just extended the visas to 10 years, multiple entry visas between U.S. and China, you will be able to get a 10-year visa which will be extraordinary. As all this goes forth, how do you take advantage of that for your business? How do you take advantage of it for your organization? You’re not going to stop it and it’s going to be bloody inconvenient if you don’t have a plan on how you deal with it.

Karabell: So on this, by the way, please kind of jump in everyone, we’re not going to have a formal—there was a mike, but—No, it wasn’t for that. They want to record, too. Do you want to—should we—

Rieschel: And tomorrow’s the big day in China, 11/11.

Karabell: And they already broke one of their records yesterday.

Rieschel: They expect, was it $40 billion now this year, $40 billion in Internet and e-commerce revenue in one day?

Piskorski: Which actually in itself was a signal of creativity because 11/11 even wasn’t a holiday. It became a holiday and it was never became a shopping holiday.

Rieschel: Exactly.

Piskorski: Incredible.

Karabell: Who are you with?

Hemant Taneja: I’m with Catalyst Partners and we do M&A advisory. I guess the question I have, and you focused a lot on them lowering the cost of various devices. Do you see them going into services a la Apple creating iTunes and the app store?

Rieschel: They already have that. Xiaomi has, the already have what’s called the MIUI. That’s there interface. That’s installed on about 6 million non-Xiaomi phones in China already. People have taken their interface and installed it on other handsets. They have an entire app store and they have an entire media management system. That’s generating in the hundreds of millions of dollars of revenue at this point. It’s becoming a pretty substantial business. So they absolutely would have an intention of making that a big part of the business.

Karabell: Is there a difference, if you can pass the mike to him, and in the interim. There’s a certain patois, a certain way in which this community, this meeting, this area, this conference, sort of talks about technology and talks about innovations, and thinks about the world in terms of the next set of apps, or the next set of technology solutions that is particular and parochial, but is also to some degree become more global as sources of funding. You can get a group of young tech entrepreneurs in Sao Paulo, or Paris, or elsewhere, speaking of the world in similar terms. I’m a little less aware, and would like to hear from both of you, because you’re more in that of, if you’re a young Chinese tech entrepreneur what’s the lens of how you’re thinking of technology and its role in society. Is it about Chinese society becoming more efficient? Is it a version of what you would hear here? And what’s driving it? Because there are certain questions that obviously, are we just inventing too many apps here versus problem solving? A debate, not a resolved one.

Rieschel: At least our impression would be that the motivation of the Chinese entrepreneur and the American Entrepreneur in their early 20s is virtually identical. I don’t see a great distinction between the two. One would feel less encumbered by the concern about surveillance and security. The Chinese have no expectation of having a completely free discussion so everything that they create is understood to be within that context. They don’t worry so much or fight so much for that, but what they look at is what would make their life better. I think that’s the common theme for an entrepreneur is will it make your life better, can you provide something to society. At the end of the day maybe the Chinese have a slightly higher point to be paid for that in some capacity then Americans, although looking at the capital flows in Silicon Valley I’d have a hard time making that statement too convincingly.

Piskorski: I completely agree with you but I think there’s a tiny twist that took me a while to figure out until somebody said it. It was at a dinner and somebody turned around and said, “Well, you have to understand for the last 20 centuries, so in the last 2000 years, China was ahead of Europe 18 of those.” And I thought, I get it. So, you were ahead except for the last 200 years. And I think there is this sort of incredible pride in China that drives a lot of people to really, “Let’s restore back the kingdom to where it was.” I often say what’s really interesting is that the Chinese word for China is “Central Kingdom” and the Chinese word for United States is “Pretty Kingdom.” I often think that’s sort of without doubt that’s going to be the Central Kingdom and we’re going to be, as you can see, the Pretty Kingdom, but not particularly central though. I do think there is a very strong call to, “Let’s bring the country back to where it should be.”

Thijn Lamers: My company’s Adyen Global Payments so we process payments for many large Silicon Valley companies like Uber. We do all the payments in Facebook. We work for most of their processing. Asia is actually one of the target markets and we actually opened our office there probably six months ago. We work with quite some companies, but mainly companies that are based in Asia, but have all those international—it’s kind of a—I talked with Liam Casey, we work with him in several ways. Is there any holy grail, like you said? Like, we started this office and we’re a global payments company so we work with many international companies. We have companies that are really based in China where I’m working on, it’s kind of—it’s really like a long time to get this going. Alipay is actually a partner of us so they kind of solved that part for us. But is there any kind of holy grail that if you are, we’re actually San Francisco based and Amsterdam based, that’s where our headquarters are, and we work with almost all Silicon Valley companies except Apple. Is there anything that you would, like, if you want to really kind of make a big impact on getting clients that are based in China, not only in China, but in the Asia region, what you would have as and advice if you just started your office there? Is there an angle that you say if you want to get—It’s a very kind of close area network, that’s what we see now, and it takes quite a while to get clients. When we started we were almost big everywhere. Asia is the last, but it’s the biggest market so that’s why we’re now addressing it. Is there any advice that you would give any company from abroad starting there? We’re on payments. We work with Alipay in many ways, but we want to do a lot of things ourselves. We are also an acquirer so—

Piskorski: I want to make sure I understand the question. What general advice would you give a company trying to—

Lamers: Yes. We are opening offices everywhere all the time. Our main headquarters is in San Francisco and Amsterdam, we’re also based in Sao Paulo and Singapore. In Singapore we opened six months ago, but we really see like to get a—I just want to see what would be your approach, actually, to get all those clients. What is the best way to do it, but it’s like—is there any kind of advice you have that you’ve seen with other companies, could be payment companies, that have done that? What would there approach have been?

Rieschel: I don’t really think this is a forum to give you advice on what to do in your business in and anything that I could give you would have no value since I don’t understand anything about your business. I don’t mean to be trite about it, but if you want to have a conversation at another time—

Lamers: Yes, maybe. Yes. It’s more like—

Karabell: I mean it is an interesting question whether or not—and these are Internet payment, all this, for all the massive multinational and private company penetration and interaction in China in almost every single area from apparel to industry, to transfer, to logistics, Internet and to some degree, payments has been, you mentioned this initially briefly, most foreign companies that have attempted to compete in that domestic market have not succeeded, Google being the most profound example.

Rieschel: Hold on though. Google, you guys don’t think Google’s in China?

Karabell: No, no. Google competed and succeeded and made its own choices about what it was willing—

Rieschel: Android’s there, so and then, because everyone thinks that Google—Facebook, how much revenue do you think Facebook gets working with Chinese firms?

Karabell: I don’t know.

Rieschel: Hundreds and hundreds of millions of dollars a year. At 90 percent margin because they put no effort into it. But Facebook becomes the Chinese preferred channel to work with in all the other markets around the world because of Facebook. So if I were—

Lamers: Well, Mark’s wife is Chinese so that helps.

Rieschel: That has nothing to do with it.

Lamers: I’m joking.

Rieschel: But no, it’s not around gaming because what they’re doing is they’re looking at Facebook as a channel. Google, like you were talking about earlier, China is about channel so if you’re working with Alipay that’s a great channel. You probably shouldn’t hope that they’re going to open up the wide market to foreign payment suppliers, just like they’re not going to open up television. Traditional media is hands-off for all the foreigners. They’re cutting back in the number of movies from Hollywood that they get. All of that is kind of a one-way street, but I think it’s figure out the channel for the Chinese firms and become their partners as they go overseas. I think that becomes I think becomes very interesting.

Lamers: That is interesting thing yes.

Karabell: The media thing is interesting going forward for every country because it’s not just China. All countries have some sort of content fetish of controlling foreign content, which is a little bit different. I mean you can understand sensitivity about not controlling the pipes, right? There’s that fear that someone’s going to—

Rieschel: Absolutely.

Karabell: But the content thing is odd and would seem to fly in the face of every other trend. We don’t say, you have to buy—70 percent of your apparel and shoes has to be domestically sourced. When countries say this about media, it’s certainly not just China, its India, and Japan. The United States has its own media percentage of foreign media, I wonder how that’ll break down. But it is true that the domestic market for things like Internet and communications has not been a welcoming and propitious one to foreign players. It may be that the navigation of—the thing that used to be said was; because of the opacity and the ambiguity of things like regulations and what can or cannot be done, because none of that’s written down, it’s not codified, there’s no, “You shall not say, ‘Let’s not gather in Tiananmen Square at four.’”

Piskorski: No, it actually does say that.

Karabell: Well maybe it says that, okay.

Piskorski: If you open a website, I think it’s actually the opposite in China, in order to open a website in China you often have to go to 17 different ministries to get an approval.

Rieschel: As a foreigner you have to understand, a foreign firm cannot run a website in China.

Piskorski: Right.

Rieschel: Right. So, they have the ICP which is called the Internet Content Provider License. The whole VIE structure, the variable interest entities structure exists because SINA in the late nineties was granted approval to—so a foreign firm SINA, off shore, set up a WFOE in China that then contracted with the domestic provider who had an Internet content provider license on a flow-through entity which allowed SINA to collect revenue and have the entity to be recognized overseas and list. That’s how SINA listed. That structure is illegal by Chinese law. It is illegal. It was allowed and they’ve never officially ruled on it. Now the problem they have is Tencent uses that structure, Alibaba uses that structure, Baidu, so they have about three quarters of a trillion dollars of market cap tied up in companies that have an illegal legal structure in China.

In terms of ambiguity you can’t get much more ambiguous than three quarters of a trillion dollars of market cap companies operating under an illegal structure. The American Chamber of Commerce in Shanghai is an illegal entity as it’s structured. It’s like, okay! A lot of foreign firms, the thing they run into is that ambiguity is, is it going to be enforced against us? Is it going to be enforced today? That’s where I think a lot of the art in doing things in China is understanding where the enforcement will come from in a lot of the structures.

Piskorski: And it all holds basically on good relationships with the state. The state basically says, “We’re not going to enforce that.”

Audience: I have a question. We launched our business in China four year ago. I think there’s a tremendous focus on the growth and opportunity and just the energy that’s happening in China. I’d be curious to hear from you guys what you think the greatest threats that exist in doing business in China and in just in what’s happening in China now. A year ago I sat on a panel where people were actually predicting the downfall of the communist party within 10 years, and that the corruption issue that Xi Jinping is pursuing with the tigers and flies could actually precipitate the discrediting of the entire communist party. What are the big things that you worry about when you think about the Chinese economy and political situation now?

Karabell: I’ll take a quick stab at this because I thought about this a lot. One, and I don’t mean this in any way flippantly, this is how I think about these things. Give me five minutes and I can probably predict the downfall of every system globally in the next 10 years in that the fluidity and the speed, and the multiple parts, and the ways in which traditional modes are being disrupted, lends itself to pretty cogent and not highly improbable analysis of things falling apart. But in no way do I, and again, this is just me, feel like anyone can make a convincing case for any of it. It’s, just who knows, right? There’s a lot of dominoes that have to fall. History is certainly replete with examples of implosion and collapse. You can never argue against that. I do tend to feel the weight of the past 20 years is a much more dramatic inertia. You have to kind of believe it. There’s no proof of any of these outcomes. I’m sure you must believe it intuitively and we must all believe it because no one really starts a business in a place that’s going to fall apart, or at least not wisely.

I think the weight of what has been going on, it’s almost like, for me, a very simple equation of if you create the conditions on which several hundred million people, in the case of China, more than a trillion, are seeing a manifest improvement in the material circumstances of their lives with a self-perception of a greater realm of freedom than what existed before, that’s a very hard thing to stop. Now, if it stops and that statement ceases to be true, all bets are off and who knows what? But until that has happened, it hasn’t. And China remains a place where, whether, you know this stuff, whether it’s 7 percent growth or 6.5 percent or 8 percent, and I don’t think the GDP number matters accept as kind of a party optic and a global optic. What really matters is do people perceive—I mean if I were in China now in a city I’d want to know that the banking system, I can have a place where I can put my money that was stable and I could find a way to invest it that wasn’t my mattress or a piece of overpriced real estate. It’s not that there aren’t concerns, but I find it very hard to identify one concern that seems to me really credible. There’s a lot of debt and it could collapse, but there’s—but you’ve known this in the last 18 years. How many Shanghai real estate bubbles have formed and collapsed in 18 years? Americans act like there’s this one bubble that’s building, but if you’re in Shanghai the prices will go on up 100 percent and down 50 percent and up 75 percent and down 50 percent, which if it happened here would be a source of complete and utter hysteria. That’s just my—

Rieschel: I think my one thing is to realize Xi Jinping is a true believer, true believer in socialism. There’s been a narrative for a while that he’s only doing what he’s doing to take out enemies. That is not the case. We’ve had a chance to get to know Wang Qishan a little bit over the years and a good friend of ours actually knew Xi Jinping’s father. Their point of view is that this guy is very sincere because he really knows it’s what’s best for China and he’s put himself and a number of people at risk for that. It doesn’t mean that that means it’s going to work out well, but it does mean the idea that it’s insincere in some ways is disingenuous, I think that idea should be scrapped. They’re sincerely going down this path. The leadership really believes it’s what’s right for China. What will be interesting is when this government ends several, I think five of the seven, if not four of the seven, are replaced in the next term, it will be fascinating to see who they replace that group with. Because the initial idea, the initial concern was; this leadership is too old so Xi Jinping would never be able to get done what he wanted to get done. Ahh, oops! No one quite expected him to be able to consolidate things as rapidly as he has. He actually will have a great deal of influence, I think, on the maybe the next two leaderships even after he’s not the person in charge. But, make no mistake, he’s very sincere, he really believes it’s the right thing for China. And can he overcome the incredible resistance in the bureaucracy to be successful? That is what time will tell.

Piskorski: My answer to the question is slightly different. It comes back to what we were talking about. We don’t understand the economic implications of what happens when a lot of these Chinese companies go outside. Once we do actually understand it, I actually do worry about the backlash here. I often think that the biggest problem that China faces is us rather than themselves in some ways. You already see that a little bit. Imagine what would happen if all of a sudden Alibaba buys something really big here, like PayPal suddenly.

Karabell: eBay.

Piskorski: All of a sudden you can imagine, “Oh my God! We’re under attack. We must retrench.” And crazy things might happen which will actually influence the economy there and the company there. And we’re very good at that and that’s my worry particularly because it’s going to come as a surprise. Because if we were ready for this then we could actually make some steps now, but I think it’s going to come as a surprise and then we’re going to have this sort of gut level reaction.

Karabell: The flip side of that has been because of the experience, not really in the tech space, a little bit in the tech space with 3Com a few years ago and the whole national security, and anything that involves tech starts involving the CFIUS committee and treasury which can immediately mean that any Chinese company trying to buy anything that’s technology can be considered to be national security. But a lot of Chinese companies have said, “Look, it’s not worth”—as much as the American market remains unbelievably attractive for technology and other stuff, there’s all these other parts of the world where we’re not going to come under the same level of scrutiny and if we do deal in Sao Paulo, or we do any kind of business venture in Africa, it’s just not going to have the same obstacle. So, why not go where there isn’t that kind of friction?

Rieschel: Again you’ve never seen—the only foreign company, I guess China Mobile was like that, but the only truly independent private company that’s ever received the kind of market cap that Alibaba has, were NTT and China Mobile, I think, in the past, or Sinopec. Those really stayed on—

Karobell: And a few of the China life insurance companies which were also.

Rieschel: But in terms of really a purely private firm nothing’s even close to Tencent or Alibaba. What can’t they buy? They could buy the Reliance Group in India four times if they chose to. Think about that. That’s an $80+ billion—I think it’s only 60, so maybe it’s five times—but it’s really the first time we’ve ever gone through something like this. I mean, eBay’s market cap compared to Alibaba was one-fourth, one-fifth today? This is unchartered territory and it certainly will be an interesting challenge because if you say, “They don’t have the right to buy what they want,” okay, well how far do you want to take that particular argument? And it’s no longer such an unbalanced equation where you’re going to be able to dictate those terms of engagement.

Karabell: I think we’re being summoned to lunch so thank you so much for participating.