Venture Capital in China with Gary Rieschel

Episode Transcript
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(00:00):
[MUSIC]

>> Elizabeth Economy (00:08):
Welcome to China Considered, a podcast that brings fresh
insight and informed discussion to one ofthe most consequential issues of our time,
how China's changing andchanging the world.
I'm Liz Economy, Hargrove Senior Fellow,Co-Director of the program on the US China
and the World at the Hoover Institutionat Stanford University.
Today, I have with me, Gary Rieschel,
who's founding managing partner of QimingVenture Partners, a venture capital firm

(00:31):
that he started with his partner DuaneHuang in Shanghai almost two decades ago.
Gary is one of the most knowledgeable andsuccessful VC investors in China, and
I'm delighted to have him with us today.
Welcome, Gary.

>> Gary Rieschel (00:43):
Yeah, good morning, Elizabeth.
Thank you.
It's a pleasure to be here.

So, before we dive into all of the hot topics of the day,
like whether China's alreadysurpassed the United States as
the world's center of innovation.
Or how new US Investment restrictionsmight affect venture capital opportunities
in China, let's get a littlebit of historical background.
You started teaming in 2006,
well before many big Western VC firmseven thought about investing in China.

(01:09):
What made you think thatChina was the place to be?

So when I had been at SoftBank, running SoftBank's investment
group from 95 to 2004, during that time,I set up two funds in China.
So we helped Chauncey Hsieh set upSoftBank China Venture Capital in 1999.
And then in 2001,
as part of a buyout of a jointventure that Cisco had with SoftBank,
we set up a fund called the SoftBankAsia Infrastructure Fund, or SAFE.

(01:36):
And those two gave me SoftBank Chinagave me a very early look.
SAFE gave me a look at the consumermarket because one of its most
successful investments wasa company called Shandot,
which became a very largegame gaming company there.
And then I also helped set up a fundwith a gentleman named Feng Bo and
his partner, Chris Wadsworth,and that was in 2004.

(02:01):
And Feng Bo wound up marryingthe granddaughter of Deng Xiaoping, so
that gives you some indication.
And his brother, Feng Tao,set up new margins.
So when I went to China at the end of 04,
I actually had insights into threeoperating venture capital funds pretty
much before anyone in the west had toomuch experience or exposure to that.

So did you feel well prepared sort of for
the challenges that you would face,or did certain things surprise you?
What were the kinds ofchallenges that you encountered?
Again, being a pretty early investor.

So some of the challenges that were immediately obvious
was there was no infrastructure atthe time to Support venture capital in
Silicon Valley.
You had 40 years of accounting rules and
regulations, you had allthis legal experience,
you had deep knowledge on generationsof entrepreneurs who would give you
reference support as you were looking atinvestments with other entrepreneurs.

(03:00):
So you could cross reference quite a bit.
There was none of that in China, soit was really greenfield, the accounting.
Even by Chinese standards,it was ambiguous.
China celebrates ambiguity in many ways.
But even by Chinese standards, theaccounting systems, the legal systems were
very ambiguous, and you had to be verycareful on references because when you

(03:22):
called someone on a reference,the answer was always, they're a nice guy.
And it was something where you really hadto form a network of people that would
tell you the truth about people.
And that partly I had an advantage withthat because people trusted me because of
what I had already done.
And so that was one ofthe major issues that came up.

(03:45):
The VIE structure in terms of whatyou were actually investing in.

VIE means.

The variable interest entity structure,
in which it was illegal for a foreign firmto actually have an Internet license,
they treated it like a media company.
So it was illegal for a foreign firmto actually own a license that was
promoting content directlyto Chinese consumers.
So you had to set up an entitywhere a partnership or

(04:13):
a partner in China held that license andthe offshore entity had
a subsequent agreement with themto be able to use the license.
And so, that wound up being, you know,that's how CNIP went public.
Many, many of the Internet companiesin China were under that and
it wasn't prohibited, butit wasn't expressly permitted.
So you were investing in a legalentity you weren't sure of the long

(04:38):
term viability of, sothat part was a little bit interesting.

Can I just ask who was your Chinese partner?
Who?

So Qiming didn't need that, but
any company we investedin that invested dollars.

Okay.

Had to have that, had to have that.
So Qiming didn't need tohave anything like that.
Dwayne, as you mentioned earlier,was my partner.
But so, but the companies we investedin that were doing anything on consumer
Internet needed to have somekind of relationship like that.

Okay, I see.

And then, there were other things, the government regulations.
There were four different entities thatwere trying to govern VC at the time and
they had conflicting guidelines.
So you got to pick, you kind of had topick which ministry you were going to be
in violation of today when youwere setting up the funds.
So it was like that prehistoricsoup of primordial ooze that

(05:31):
you're basically figuringout how it's gonna coalesce.

So you must have figured it out pretty well because I know
you had some prettyhigh profile successes.
You want to talk a little bit about those?

Well, so the firm, the key thing was actually finding a partner.
I always find it entertaining when peoplesay you can't find good partners in China
and I think that's just ridiculous.
That's like saying, well,
somehow it's a different species ofhuman being that you can't partner with.
And I just totally reject that,I'd known Dwayne for a number of years.

(06:06):
I interviewed several different VCs,
several different people when I was inChina to see who would be a good fit.
And Duane was clearly,you know, the best fit and
turned out 20 years later to havebeen a very, very good decision.
So that was really the keything that one had to do.
The other things we did was we insisted,I should say I because at the time I

(06:27):
was quite a bit more senior thanDwayne in the overall industry and
I insisted that everyone'scompensation be the same.
So if you became a managing partner,everyone got paid the same as me,
both cash and carry.
Extremely unusual for China.
Still unusual for China.
The other thing we did waswe focused on sectors.

(06:48):
So instead of having everyone try to doeverything, we anticipated that having
deeper knowledge as China, asthe investments became more technical over
time having more knowledge in technologyareas would become more important.
So we had a consumer Internet sector,a core technology sector.
And then quite unusual for the timetime we invested in healthcare and

(07:09):
set up what became China's largesthealthcare investment operation.
So those were things that we spenta great deal of time on, you know,
at the beginning and I will say thatthe maybe one of the proudest pieces
of the Qiming story to me is how theculture has actually lasted 20 years and
is really celebrated bythe senior people in the firm.

(07:31):
That, that actually has been phenomenal.
The deals.
The deals are the deals.
We had one of the realfoundational Companies for
Fun 1 was a company called TigerMedwhich was the first clinical research
company in China to offer the samelevel of standard and analysis for
conducting clinical trials onnew pharmaceutical products.

(07:53):
Became it was the first company thatwe listed on a Chinese exchange.
The really funny element of that.
Was it?
I was the board member.
So the guy who doesn't speak Chinese andwho doesn't read Chinese actually
has to take the Chinese SecurityRegulatory Commission test for
a board member to list this onthe Shenzhen Stock Exchange.

(08:14):
It was a pretty hysterical process.
And I would say that.

Wait, I wanna know what you scored.

Perfect score, of course.

Okay.

And let's just say there I had some advising on the side, but
what they really.
And it's not a bad.
It wouldn't be a bad system for the us.
This goes back to a theme of we canlearn things from the Chinese and
how they do things.
They came and they interviewed me fortwo hours on Tigermed's business.

(08:45):
We went through whatthe gross margins were,
we went through whatthe risk factors were.
We went through all these different thingsin order to be a director of a public
company in China.
I would submit to you we might not bebadly, we might be a little better off if
people in the US had to gothrough those kind of tests.
They had some clue of what the businesswas they were sitting on the board of.
So fund one had Tigermed andthat returned the entire fund.

(09:07):
And after several years,fund two wound up being quite special.
It had two huge hits.
One was Gan and Lee, which was a diabetesdrug company, which had a funny story.
Our partner who was running the healthcarepractice couldn't get a meeting with
the founder.
And it turns out that one of our bestfriends at school, there's our sons,

(09:30):
were together in class andover a weekend conversation,
the father says, well,I'm best friends with Dr Gan.
Do you want to get a meeting?
So we flew to Beijing andwe set up a meeting.
And so that returned a billiondollars to Qiming and then Xiaomi.
And Xiaomi, of course has become oneof China's iconic tech companies.

(09:52):
And the founder, Lei Jun,did a spectacular job.
Duane did a spectacular in advisingthe company over many years.
And soeach fund has had those kind of successes.
So we're raising our ninthdollar based fund now.
We can talk about dollarfundraising now versus RMB later.
But the team has done a spectacular job.

(10:13):
How many people do you employ todayjust to give a sense of how big you are?
100 people.
And we have, including a guidance fundwe manage for the Chinese government.
The team in China manages forthe Chinese government.
It's about $12 billion.

I'm just curious, you know, when you first started out and
you were hiring people, clearly therecouldn't have been that many people who
had experience doing this kind of work.
What did you look for in your early hires?
I mean, aside from Dwayne, your partner,what were the sort of the qualities that
you looked forin the younger Chinese that you hired?

That's a great question.
And I think that VCs getquite full of themselves.
I always find it quite humorous when a VCsays, well, we did this and we did that.
The reality is no, you didn't do that,the CEO did that or the team did that.
And you need to be, you need to keepthe perspective that you're a service
industry to support entrepreneurs.

(11:11):
That's what we recruited for.
So you recruited for people that had thementality that they understood that they
were there when the CEO made a phone call,needed help, that they had some expertise,
some technology background,some operating background, but
they could really take that call andadd value and support the CEO.
That was the primary requirement.

(11:33):
I've always recruited, for the last40 years, I recruit for two things.
One you can know andone you have to experience.
The one you know, you can know.
If someone's curious,that will come out in an interview.
You cannot know someone is generousuntil you've worked with them.
And for me, generous wasequally important in some ways,

(11:54):
maybe more important than being curiousbecause there is a way of thinking,
of being able to inconvenienceyourself that if you're in a service
industry you have tobe willing to do that.
And so those are really the keyattributes we look for.
They had to be smart.
Lots of smart people in China andgood investors.
Venture investing is hard.

(12:16):
We had one partner who waswhat I would call a very,
very good investor buthe could not do really early stage deals.
And so we parted company.
I mean, if you pass on ByteDancetwice without showing it to you,
without showing it to your partners.
I'm sorry, I'm sorry.
There's a cost associated with that.

Yes.
So just it's what you're saying is ittakes a certain skill set to recognize
the potential at an earlystage that not everybody has.

I think that's right.
I think that's right.
Especially if you're doinga team oriented approach,
which means you're not just going to haveone person making all the decisions.
And again, one of the things I wasvery careful about with Duane was it
made no sense to have Qimingrevolve around an older white
guy who at some point wasgoing to leave China.

(13:08):
The dream was Qiming was goingto last at least 30 years.
We're 2/3 of the way there.
And so I think the idea that we reallyalways organize Qiming around what
the next generation is gonna look like,that's really held us in good stead.

Yeah, and obviously it's paid off well.
So if you take a step back and you look atthe overall landscape of Chinese venture
capital, you know, what do you thinkof as sort of the landmark moments in
the evolution of the space, you know,since you started working there,
up until now, either positive ornegative, were there moments when you

(13:45):
saw just like big inflection pointin how the industry was developing?

I think that certainly the 2005 timeframe,
there were quite a few groups that startedto talk about it started to come together.
There was a, there was a Silicon Valleybank trip in 2003, 2004,
I think that brought over a bunch of thesenior VCs and I remember having dinner.

(14:12):
We're sitting on the Bund andyou're looking out over Pudong and
it's like, yeah,maybe there's some opportunity here.
And so you could feel the energy,you could just feel the, the,
the vibe if you will.
And so that,
that put China on a lot of people's radarscreen as an investment opportunity.

(14:36):
I was the only senior VC toever really move to China.
Some people would spend a couple.
No one else from Silicon Valley evermoved to China and stayed there for
any extended period of time.
However, 2005 also hadthe formation of Sequoia China.
And I have to give full credit,Neil Shen without question has created

(14:56):
the most successfulinvestment platform in China.
They deserve all the credit andhe deserves the credit for that.
You also had Kathy Hsustart Capital Today.
You had Deng Fung start Northern Light.
And I was involved in all of thosedifferent discussions in one way or
the other.
GGV Ji Xun Fu and Jenny Lee came together.

(15:18):
So then,Hans Tung came in later to Qiming.
That was kind of the,the formative JP con,
that was kind of the formative 2005, 2006.
So I would say the formationof those firms,
the willingness of the foreignfirms to hire local people and
not have them run from Silicon Valley,you could look at that as a formative

(15:40):
decision point in terms of how firmswere thinking about being in China.
I think if you look at healthcare,the success of Tigermed fundamentally
changed China's healthcare industry cuzforeign pharmaceutical firms coming
to China never had a partner likea quintiles in the US that could conduct.
Trials at a global level,global quality and analytical level.

(16:04):
So before we invested in TigerMed in 2007,
2008, 95% of TigerMed's trials were for
generic pharmaceuticalswithin the Chinese market.
Within five years,95% of his trials were for
novel pharmaceutical productsinto the Chinese market.
So just the entire business flip.

(16:25):
So creating that capabilitywas definitely there.
I would say as you get into this 2008,9 and 10 time frame.
E-commerce, when Alibaba did twothings that fundamentally changed
the face of E-commerce,basically globally.
Number one,when they went after ebay with Taobao,

(16:46):
the launch program,spectacularly successful.
SoftBank was heavily involvedin supporting them in that.
Because the market they were selling into,
China is a low trust society.
The institutions haven't establisheda great deal of trust with
the Chinese people.

(17:06):
So with E Commerce, you're askingsomeone to look at a product that
they can't touch, buy it,pay money to someone they don't know, and
then try to figure out how toreturn it if they don't like it.
So what Alibaba did is in the earlydays they went to the courier services,
they were having trouble.
They were having a lot ofcomplaints by customers.

(17:27):
Not timely delivery,very awkward to return things.
They told the couriers, you willpick it up within these windows or
you don't work for us.
You will deliver it within thesewindows or you don't work for us.
You will wait for the customer to pay,and try it, and approve it, and
take it back if they don'tlike it fundamentally changed.
I mean, when a companyestablishes trust in a society,

(17:50):
that company usually windsup being very successful.
Second thing they did Alipay.
And when you look atthe genius behind Alipay and
10Pay later with 10cent,97% of all banking transactions
in China before that were donethrough the banks, UnionPay, etc.

(18:11):
Ten years later, 93% were done without thebanks of electronic commerce transactions.
So that was a big,big moment where you establish trust,
you establish convenience.
And then at the same time it also to meis the example I use with US government
officials.
Do you think the Chinese governmenttold Alibaba to do that?

(18:32):
Do you think this beautifulcentral planned economy,
this was no, they were gutting the banks.
So this was something that.
It's a perfect example ofthe entrepreneurial driven success that
China's had in its economy.
Not a centrally planned economyin terms of bad things.
One that doesn't get enough attention.

(18:53):
2015, 16, China had a fairlysignificant market collapse.
And Xi Jinping,the champions team came in, they went,
were buying stock, andthey tried to forestall the collapse.
It didn't work and it kept getting worse.
And, and I've been told by people thathave met Xi numerous times that that

(19:14):
really created a problem for him thatthere was a market, there was something
inside China that he didn't controlthat could have material impact on the,
on the, on this, on the harmony inthe society, happiness of the people,
pick whatever term you want.
And he flipped.
And that dirt after that time,the idea that he could allow market

(19:35):
mechanisms to really make a lot ofthe decisions for him, it also,
the VCs missed it, Qingming missed,everyone missed it.
When CSRC started tobecome far more regulated,
they had been opening the stock market up,pursuing a US listing orientation,
and then it became CSRC approvingthe listings between 2018 and

(19:59):
2022, 23, liquidity dried up.
And so we have a problem in China now.
The geopolitics are one thing.
We have a problem in that liquidityhas generally been very, very poor.
So the foreign money that'sgone into China is stuck.
The R&B money that went in is stuck,so you have a dramatic constipation

(20:19):
problem on the back end of gettingthese companies into the public market.
And that's the part that whenthe regulators become that involved in
the public markets,if you're a stock broker,
if you're buying stocks, how do youtrust that that's a real market.
And China has yet
to really establish trust in itsentire capital market structure.

(20:42):
Sorry, I went on for a while.

No, that's great.
I mean, and it, it brings up anotherquestion that I had, which is, you know,
Xi Jinping has placed a lot of importanceon China's rise as a technology power.
He's invested, you know,
had the central government investhundreds of billions of dollars.
But you're pointing out thatin technology innovation and
that's advanced manufacturing.

(21:05):
But you're suggesting that the regulatorystructure that the government has put in
place is, is actually really constrainingthe opportunities at this point for
more, you know, venture money to go in,probably private equity money to go in.
Certainly they must realizethat they have a problem.
And you know,

(21:25):
Xi Jinping has been on this big campaignrecently talking to all these, you know,
head CEOs of companies, saying we're openfor business, we want your business.
Does that just not applyto the venture world or
is it simply that they're open forbusiness?
But they're not planning tochange any regulations or
anything that's actuallygoing to make things open up.

Well, we can go back and look 30 years ago when they had the 863
program that was targeted atthe automobile industry and avionics.
And 20 years later, was anyone buying,
anyone outside of China buying a Chineseinternal combustion engine car?
No.
And so the government led.
And then you look at the hundreds ofbillions of dollars blown up in their

(22:07):
semiconductor initiative withnot nearly as much to show for
it as they would expect.
So when the government picks,when the Chinese government or
any government has triedto pick sectors to develop,
it's almost irresistible forthem to not also pick companies.
And the two things that China madea mistake on was they were picking state

(22:31):
owned enterprises andJV partners with U.S.
automotive makers,European automotive makers.
And those weren't terriblyinnovative organizations.
And when people talk about IPstep misappropriation, theft,
et cetera, a lot of it really did comefrom that time during the, during the 90s.
And then you look at the,the semiconductor, the amount of graft and

(22:54):
corruption that they uncovered with peoplein those massive funds they were putting
into semiconductors, that was a,you know, that's a similar problem.
Biotech.
They actually, if you look at biotech, itevolved in China because foreign firms set
up labs in China, sent thousands ofextremely well trained engineers and

(23:14):
scientists back over andfive years later they were doing
what the Chinese are very good at andthey said, let's start our own company.
And you wind up havingall these spin outs.
And that created the innovationengine in the biotech world.
So it's not that the government policies,the direction at the beginning

(23:34):
saying go innovate, they tried touse the state owned enterprises.
That's a problem.
The state owned enterprisesare not terribly innovative,
certainly not in the consumer electronics,automotive the new evolving tech areas.
AI, that is where the innovation is.
So I, when Xi Jinping heldthe meeting recently with the 30, 30,

(23:57):
31 tech leaders, I.
I doubt very much whether sixmonths ago he was thinking
that was a great thing to do.
I think he was thinking we really,
really need these state ownedenterprises to step up.
And after 10 years and hundreds ofbillions of dollars, he had bupkis,
nothing to show forit from the state owned enterprises.
And so if you didn't figure out howto bring the private enterprises into

(24:21):
the fold, and so now he says,you're the future of China,
you're who we have to cooperate with.
Again, not his first choice.
The other thing that came out of that, themost important thing that came out of that
meeting was something that was not reallycovered that well in the US press.
Two days later, sasac,
which is the organization that manages allthe state run assets, as you know well,

(24:46):
issued a directive, not a suggestion,a directive to every state owned
enterprise that they were to adapt AIbased technologies as rapidly as possible.
So they basically, because there's beenno enterprise software market per se in
China, you know,if you look at the 50 largest companies,
enterprise software companies in theworld, maybe two are Chinese in terms of

(25:08):
true software company Tencent, you includeTencent, but it's really a gaming company.
So same thing in the largepharmaceutical companies.
So the fact that the state owned assetbureau said you will adopt these
technologies and those technologiesare going to come from private companies,
they're not going todevelop them themselves.
That's a pretty power.
Because what it does, it creates a newplatform to leapfrog the last 30 years of

(25:32):
enterprise software development andput it on a new AI based platform.
They now have initiatives for education.
Every kid, starting at a grade three,I think it is,
is going to be learned to use AI tools.
Whereas, the US government is sittinghere with the US education system.
The unions are saying, well no,

(25:53):
we don't want the kids to useAI because they cheat, okay?
But there are a lot of tools forthe teachers.
We're not, andmy son teaches physics at high school,
they're not letting him evenuse the teaching tools.
So again, when the government backfills,when there's something that's obvious they
have to do and then they backfill, they'repushing from behind, they're not leading
it, they're not directing it,but they're pushing from behind.

(26:16):
They can be very powerful.

Right, and
what you're talking about really isthe deployment of the innovation at
this point, right?
You're not talking about the innovationitself coming from the government.
You're talking about basically creating amarket for those technologies throughout,
as you say, the educational systemthroughout, probably government offices.

(26:38):
So that's great because that's also justgoing to boost the opportunities for
those Chinese companies.

That's exactly right.
And another example,a lot of folks in the us a lot of people
in the venture community commented on thecrackdown on private enterprise in China.
And I actually disagree with that as apremise because the private companies they
cracked down on were quite specific andthere were very specific reasons for that.

(27:11):
The online tutoring business orhome tutoring.
Well, number one,all the people doing the tutoring, or
many of them were teachers who are alreadybeing paid by the government and
they're making a lot more moneytutoring than they were teaching.
So the government didn't like that.
It also didn't like the fact thatthey were teaching curriculum that
the government didn't control.
So again, they approach itfrom a control perspective.

(27:34):
So they shut down the teaching market.
Jack Matthew, all due respect to Jack,you're not allowed to have a school
of Jack Ma thought in the eraof Xi Jinping thought.
And you're not allowed to freespeak quite as freely as Jack did.
And so he was put in the penalty box fora number of years.
Tencent they restricted the amount oftime that people could play games.

(27:55):
Maybe that's another idea for
the US that wouldn't be the worstidea that you can only use Douyu and
you can only use TikTok a couple daysa week if you're under a certain age.
You can only play games a certain numberof hours if you're under a certain age.
Some of these ideas are really not badwhen you look at the concerns that people
have in the US about online gaming,social media, et cetera.

(28:15):
But again, these were fairly isolated,they were powerful and
they had rippled effects.
But it's not like they went toevery Chinese entrepreneur and
said don't innovate orstop being an entrepreneur.
We don't see.

Exactly.
I think that's really,really important point.
One of the things when those, when thatcrackdown happened that occurred to me is
what, andit's you to your point about control,
is that really what theycracked down on were those
industries that dealt with the free flowof capital and the free flow of ideas.
And those are things it's not about, youknow, innovation in biotech, for example.

(28:51):
They're not cracking down, you know,in that space in the same way nonetheless.

Exactly, that's exactly right.

But, but nonetheless,
I think looking at the landscape today,it seems as though it hasn't really
rebounded and you said part of it's justthe inability to get, you know, money out.
What else is going on, what needs toshake loose where sort of describe
what you see as the venture landscapetoday because it seems to me it's changed

(29:19):
a lot from US firms being deeply engaged,then your Chinese firms popping up, but
maybe even they're somewhat constrained.
Is the government basically,becoming the number one choice for
venture investing at this point?
Again, trying to pick the winners.

What does it look like today?
It's definitely evolving.
I would say the transition time reallyoccurred during COVID when foreigners
were not really able to or certainlychose not to go back and forth to China.
China had shut itself down.
All sorts of socialrepercussions came out of that.
But on the, in the venture side,a lot of the,

(29:57):
not a lot of the knowledge basedpeople that would go over and
talk to startups weren't spendingtheir time doing that as much.
Another thing that happened was, you know,
you had the beginning of the geopoliticalduring the first Trump administration,
you had some of the geopoliticalconcerns being expressed.
Biden took some of that.
You know,you worked with Secretary Raimondo.

(30:18):
You know, I thought that Biden dida serviceable job in his administration in
institutionalizing a number ofthe things that Trump may have said.
But Trump doesn't institutionalize things,
whereas the Biden administration actuallyinstitutionalized processes around
some of the restrictions,the semiconductor restrictions, and so on.

(30:39):
So I think that there werea number of those things that,
that had kind of cause peopleto hit the pause button.
But the single biggest issueis the liquidity side.
We have numerous LPs in Qiming that theirventure allocation now is, exceeds their
entire private equity model, privateequity and alternative asset model.

(31:00):
So you have someone who's 32% investedin Venture when 23% was supposed to
cover Venture PE, hedge funds, et cetera.
So that's a problem.
So the US IPO market havingdifficulty the last several years.
China basically shut down itsIPO market for 18 to 24 months.
And so that combination,you have all this capital that's trapped.

(31:23):
I would submit there would be a differentconversation on a lot of the geopolitics.
If the liquidity markets in China hadkept a pace and had continued to that,
you'd have a lot of institutionssaying maybe we will continue,
we will invest less in China,but we'll continue.
You'd have the geopolitical umbrella is avery convenient umbrella to hide under and

(31:44):
say that's why we don't want to investin China because large pension and
endowments don't want to say publiclywe kind of blew our model apart and
we don't have liquidity,
so that's why no one's going to want usto come out and publicly say that, so.
I think that that's really one ofthe things that's not getting enough

(32:04):
attention.
The liquidity side reallyto me is the primary issue.
The geopolitics.
The semiconductor industry spoiledthe government in Washington DC,
because it allows for choke points.
And if you control access tothe technology in those four or
five choke points, you really canthrottle back someone's development.

(32:26):
AI is not like that.
Biotech is not like that.
So when I'm on these working groups andthey say, well,
we want to constrain Chineseability to develop AI for
two years I was sayingthat that wasn't possible.
And then, thank God,Deep Seat comes out in January and
tells everybody that's not possible.
Biotech, it's not possible.

(32:47):
A case comes out and says, we happen tohave a drug that's better than Keytruda.
That's now first in class.
Sorry, not first in class, butbest in class cancer drug.
And so I think that when you pick yourbabbles on technology restriction,
you need to be very realistic as to whatthe structure of that industry is and

(33:09):
what it is you're reallycapable of constraining.
And I would submit that AI withthe US The US needs to focus more on,
as you mentioned, what I call diffusionof this technology in schools,
in companies, as rapidly as possible, and
then also around the world becausethere's still 4 billion people who

(33:29):
don't have access to the kind oftechnology we take for granted.
And the US needs to bethe leader in helping them get
access to that technologyover the next decade.
That's where leadership will come from.
It won't come from trying to constrainsomeone else from developing it.
Not possible.

Yeah, I honestly couldn't agree with you more.
I think we spend much too much time tryingto think about how to slow China down and
not enough time thinking about howwe enable ourselves to run faster.
I mean, I often think about it as.
As if you are actually in a physicalrunning race and are you spending all your
time looking behind you to see,you know, is that person catching up and

(34:10):
trying to think about whether you couldtry to trip that person and stop, stop him
or her, or are you actually just focusedon crossing that finish line first?
And I think over the past eight years,and certainly now,
I think I'm quite concerned thatwe're much more focused on that,
trying to slow down as opposed to tryingto enable ourselves to run faster.

(34:35):
So let's talk about that sort of state ofthe competition between the United States
and China, that the Australian StrategicPolicy Institute, known as ASPI,
has received a lot of attention forits Critical Technology Tracker.
And it basically looks to see howmany papers are being published by

(34:57):
researchers in a country thatare called high impact research papers.
And now it says China is the number onein 57 out of 64 areas of technology.
Robotics, advanced materials,biotech, cyber.
Do you think that this is a usefulway of framing sort of who's leading

(35:18):
in innovation?
Do you think it's an accurate assessmentof the state of, you know, competition,
if we want to frame it as a competition?
Competition between the United States andChina,
how do you understand that kind of data?

I think that data, what it does point out to me the big takeaway
from looking at that is maybe we shouldn'tbe using the federal government.
We shouldn't put the federal governmentin a war against the universities and
research institutions and saying thatif you don't believe a certain way,
we're going to withhold funding from you.
Maybe I would take that and say,because that's where the research papers,

(35:56):
the kind of things you're talking about,that's where they come from.
And we've now pretty much declared thata number of our top institutions are not
going to be supported by the federalgovernment in the way that they had been
in the past right at the timewhere I would submit to you,
it's probably more important than ever.
If you're really viewing China, us as acompetition, then that's one of the areas

(36:17):
of competition you have to at leastbe equal or hopefully better in.
I think that the quality of Chineseresearch has improved dramatically.
When we used to look atthings 20 years ago and
meet with the Chinese Academy of Sciences,there was frankly, very little.
The entrepreneurs were generally aheadof the research institutions in terms
of certainly how to use technology.

(36:39):
What the Chinese are really,really good at is this.
How do I say this?
They're voracious adopters of technology.
The Chinese citizens, the consumers, theytry everything and they'll try it this
way, that way they'll do it,use it in ways you could never imagine.
One of Xiaomi's great successes in theearly days was it did software releases

(37:01):
every week.
American consumers would go crazy if Applesaid every week you have to have a new
software update that can take 15 or20 minutes.
But what Xiaomi was doing was theywere also soliciting input from all
their consumers andthey'd roll those into the next releases.
It was phenomenally successful.
So the Chinese, the ability ofthat society to adopt technology,

(37:22):
very similar to the language.
You can look at the, you can look atthe innovation capability of in society.
You look at the language.
How easily do they adapt new,new terms, new ideas.
And Mandarin and Cantonese are bothCantonese even when they Mandarin very,
very quick and good at that.
English is very good at that.
There's a reason why a lot ofother countries don't adapt.

(37:45):
Their language actually is reflectiveof how the society is organized.
And I think that at the very broadbasis we don't appreciate the value of
a society that is sowilling to take new things and adopt it.
600 million people havedownloaded AI apps in China.
My God.

(38:05):
And so->> Elizabeth Economy: What's
the comparable figure in the US?
I don't know it.
Do you know what the->> Gary Rieschel: The number in the US is
about 200.
200?

200 million.

200 million.

Okay, so roughly half the population.
That's not so bad.

No, no, I'm not saying it's bad.

Yeah, yeah, no, no, no, no.
I'm just trying to get a sense for so.
Because I think, you know,let me actually just push you for
a second because I do think thispoint about how China innovates and
how how it adapts technologyis really important.
So just describe if you could in sort of
in short form China'sinnovation ecosystem.

(38:41):
Because when we think about somethingthat the US could think about and
learn from China,it seems to me that's one of them.
You know, in terms of how it collocatesuniversities and, and sort of innovation
ecosystems and manufacturing andall the different parts of the ecosystem.
Do you see something there thatthe US should be considering?

I think that the US has quite a, quite a bit of the similar.
In fact, I think a lot of the Chinese colocation model was Adapted from the U.S.
you know, you look at Stanford, you lookat Berkeley, you look at Illinois, Tex.
Pick any one of these majoruniversities in Boston.
There's very robust entrepreneurialecosystems around those universities.

(39:23):
And the thing that the US had alwaysbeen very good at is commercializing
those technologies.
Well, it turns out the Chineseentrepreneurs are also very good at
commercializing those technologies.
So I think that was a natural.
Those hubs were nat.
That's a natural formation that startedin the US and now moved to China.
And it moved to China at somepretty significant scale in

(39:45):
a number of the major universities.

You don't see a difference in terms
of the manufacturing ecosystem?

No, that's what I was going to get.
So then, when you're doing software,you have one kind of ecosystem that's.
Collaborative and innovative.
And there's something calledthe ant farm in Beijing,
I don't know if you've ever visited.
It's about 40 companiesthat are probably co.
Located in an area the size of our house.
And during the winter,the heat isn't turned above 55.

(40:13):
And during the summer the air conditioningis not turned on till it's 80 degrees.
And it's just this intense environment.
And companies come and go and
it's a y combinator on steroidswithout nearly the capital.
And so software can be developed that way.
Hardware cannot,hardware requires prototypes and

(40:33):
it requires actuallythe manufacturing process.
And again, since China now has a thirdof the manufacturing in the world,
they have a very, they have a vast andvaried capability there.
So when you look at the innovation engine,
the invention still primarilycomes outside China.
The, the completely first, first in class.

(40:55):
Something becomes,is coming from outside of China.
But then first in classdoesn't win the dollars.
They get 10%.
The best in class get the other 90%.
The Chinese are very goodabout that iteration process.
So here's the invention.
And then the Chinese go,1, 2, 3, and it's better.
And then they'll take that 1,2, 3, and it's better.

(41:17):
And they're very quick at that.
They're very quick at that.
In tech, the manufacturing base allowsthem to do that in a way that the US
really will struggle to replicate,I think, in the future.
The pharmaceutical industry is starting.
There's a reason why $48 billion oflicense fees were paid to Chinese firms
last year by globalpharmaceutical companies.

(41:38):
It's because their labs aren'tgenerating the products they need.
And the Chinese scientists are.
There's unprecedented cooperationbetween global pharma and
Chinese startups in biotech development,unprecedented.
And so that's something that we tend tobe quite intimate with on both of our,

(41:58):
both the US andchimney US and Chinese funds.
So I think that, that whole,that whole cycle,
the whole cycle time in China is very,very quick.
And I think that that's something that theUS is going to have to figure out how to,
how to adopt or how to create.
Doing it at scale is hard.

(42:20):
There's a reason why Apple lookedat building a car for six years and
I was told they spent 1 billion.
I've been told they spent 3 billion.
I have no idea.
It's some big note, Xiaomi.
Three years from the first conceptto a car in production that
the CEO of Ford says is a very,very, very good Car.

(42:41):
How could they do that?
Xiaomi has over 50 suppliers ofanalog motors and wheels and
all sorts of devices to run all of itsentire ecosystem of little vacuum.
And you think like, well,that's not the same as a car.
Actually it is, because electricvehicles are like LEGO components.

(43:04):
You take these 10 components andput it together and you have a car.
I'm exaggerating.
An internal combustion engine car,2000 more different components.
That requires a lot moresophisticated robotics,
a lot more sophisticated humanmanufacturing capability.
EVs are toolkits.
And so three years start to finish,

(43:24):
versus six by arguably two of the mostinnovative companies in each society.
And I would submit, Xiaomi,people are not smarter than Apple.
No way.
But their ecosystem ismuch more responsive and
much more capable of movinginto different areas like that.

So is that something realistically that you think
the United States could develop or
should we be looking to haveecosystems in other countries?
Are there other countries where there aregoing to be the new China, do you think?
Is there, is, is a country waiting in thewings that we should be focused on given

(44:01):
the, given the geopoliticalrealities of the moment, you know,
as you're looking across the globe, arethere other places that you're looking?

So when you say given the current geopolitical realities,
I would say there is no hope ofthe US ever being successful in this.
I am hoping that the current geopoliticalrealities are not the driving force for
too much longer.
If I think about how would I competewith China if we're playing the game,

(44:33):
the global competition game,we have North America and South America.
You have Canada,which has some really good capability.
You have Mexico,
which actually could replicate a goodpart of China's manufacturing ecosystem.
In fact, they already have.
Why are we treating them as adversaries?

(44:53):
We should be looking at the entire market,north and South America, and
that's our backyard.
It's primarily Judeo Christian upbringing.
It's an educated workforce.
It's completely independent ofneed from the outside world for
water, energy, food, et cetera.
It's nirvana as a market andwe treat it as second class citizens.

(45:16):
So if I look at the inclusionside of diffusion.
The inclusion side is there is.
It's inexcusable that the US doesn't havea policy to have manufacturing in Mexico,
Costa Rica for medical device,that we're not cooperating and
making different parts of that backyard.
Absolutely world class in terms ofsupporting the overall wealth and

(45:41):
wealth creation in those two continents.
And I don't think it's thathard to figure this out?
I'm not the first person probablyto come up with this, but
we're making it really hard.

Yeah, that's for sure.
I mean, I do think the Bidenadministration in the Chips and
Science act had $400 millionto basically dole out to other
countries to be part of the semiconductormanufacturing supply chain.
And Costa Rica is one ofthe countries that was a beneficiary.
Whether that sticks,given current administration policies,

(46:16):
I think is not clear to me.
But I think this is, you know,a very wise suggestion.
And maybe once things sort of evenout after this flurry of activity
from the new administration,maybe that kind of advice might be.
Might actually be heard.

Well, I do.
Sorry.
I do think that the otherthing that's changed, and
this is just how I think abouthow do you create gravity?
So 2014, China's GDP was 10.8,$10.5 trillion.
And the top eight tech companies inthe US were worth about 1.5 trillion,
15% of that.
Today they're 100% of it.

(46:55):
So in the last 10 years,China's GDP has gone to 17 to 18 trillion.
And excluding the last market meltdown,you look at the end of last year, the top
eight tech companies in the United Stateshad a market cap of roughly 18 trillion.
So market cap and GDP are different,but they do indicate gravity.
So what these companies now have isthey are the ones who are going to.

(47:16):
Governments do not diffuse technology.
They set guidelines for the diffusion oftechnology, companies diffuse technology.
Companies can also be the ones todrive inclusion in new markets and
new people who haven't had access to it.
That's where the US Governmentshould be spending its energy,
is figuring out how to work with thesecompanies in new technology areas to both

(47:37):
propagate the technology and also makesure that people who've never had access
to it before get accessto it in the future.
We are not thinking thatway right now at all.

No, we're not.
I hope we don't have to wait anotherfour years until we start thinking that
way again, because by that point it mightbe game over or we're moving very, very.

It's never game over, it's never game over.
But it can certainly bea very inconvenient time.

Yeah, at some point, the game does end, though.
[LAUGH] Okay,let me just ask a couple of quick last
questions that I ask to every guest.
What book orarticle on China would you recommend?
If you could recommend one that peopleshould read to understand the country.

To understand the country,
that's a->> Elizabeth Economy: Or
the US-China relationship, or justsomething that you think is important.
The book that I actually think explains a great deal of China
is an older book, is by Sid.
It's Sidney Rittenberg's autobiographynamed The Man Who Stayed Behind.
And it tells his story of joiningthe Chinese Communist Party,
being in prison twice, running the Chineseradio station, coming out, and

(48:50):
then advising Greenberg, advising Intel.
So it's a good story ofsomeone who went on a very,
very long personal journey and reallyexperienced the best and worst of Chinese
society during the period of Mao andthrough the Cultural Revolution.
I think that that, to me, is a.
I mean, again,if you want to understand China, I mean,

(49:13):
I think that your books on Xi Jinping,Kevin Rudd's books on Xi Jinping,
critics, Chris Miller'sbook on the semiconductor,
I mean, there's a lot of good material,but do they help me understand China?
They understand people in China.
But I think Sidney's book really capturesthe essence of what it was like to
be in China when the currentversion of China was created.

That's a great pick.
What issue do you think we don'tunderstand enough about China?
What do you think wekind of get maybe wrong?

It's not a central planned economy.
The next time I hear the government,well, and it's easy to understand why.
Because the US government, all the electedofficials, they would love to have
China be a central planned econ sothey can say, that's what we need to do.
It's not, and it's not what we need to do.

Okay, but now you forced me.
So do you think just Actis not a good thing?
Now you opened a big door to me,
having worked in the Commerce Departmentright at that moment.
Do you think that that'sthe wrong way to go then?

No.
There's a difference between looking attactics around things you need to do for
the future.
Biotech, AI, solve immigration,but make sure the smartest people
in the world still want to come andlive and live and study in the US.
Those are very, very importanttactics as we look forward to

(50:47):
recreating the technology society inthe US Making it more flexible and
more resilient, if you will,to competition in the future.
Those are all great things.
What I mean is that somehow the USGovernment is going to pick the winners.
And so the guidelines, the incentives,those are great things.

(51:09):
But you shouldn't be invested in whothe winner is or what the winner is, and
I think that's a distinction.
The US Government likes tothink that China actually,
no one's good at the latter,no government's good at the latter.
You can be good at the former.

So that's a good, a good list of things for
the Trump administration to considerin terms of how it can help
the US Continue to bea leader in innovation.
Is there anything else youwant to add to that list?
If you had President Trump's earright now, what would you say?
This is what we really need to be doing,Mr. President.

In the spirit of not wanting to get too down the political
rat hole,technology carries values with it.
So when you distributetechnology around the world,
I do believe values gowith that technology.
It goes with the software,it goes with the hardware,
it goes with how you train the people,how it's used.
We should be thinking much more about,instead of just trade being

(52:07):
parcels going back and forth,what is that trade really doing?
What's the trade really doingto better the American, for
the American worker,lots of things can be done.
But planning on reshoring automobileplants that employ far fewer people,
that's not going to happen.
Lutnick came out a week ago and said,well, we're not gonna be employing people,

(52:29):
we're gonna use robots.
It's like, okay, well,good, he's at least being
honest that this isn't gonna gothe way that people are talking about.
So I think that you haveto start with the values.
What are the values that you're reallytrying to propagate around the world?
If you win that, if the values that gowith the technology are the long term good
values for America, America'sgoing to win and it will win huge.

(52:53):
And I see the current administrationpaying no attention to that whatsoever.

That's a big,
big issue that we could spend a lot oftime on of what constitutes values.

I mean, the venture world, the venture world,
the money's down to invest in China.
And so it's actually, perversely,it's creating maybe the best investment
opportunity in many, many,many years because there's so
little capital that the capital hasvery little competition for deals.
So I would actually expect that what willcome out of China from an investment

(53:25):
return perspective overthe next five to ten years or
the next five years certainlywill be very, very good.
And that's just because they haveconstrained the dollars going in.
So if you have the dollars, theentrepreneurs didn't die, you know, and
the entrepreneur's ecosystemis still very, very robust.
So you have the same amount of capitalthat was available 20 years ago in

(53:48):
a vastly larger andmore sophisticated ecosystem.
I view that as a good investment bet.

Yeah, I'm not sure that that's gonna be where the Trump
administration->> Gary Rieschel: No,
I'm pretty sure it's not->> Elizabeth Economy: US policy.

[LAUGH] >> Elizabeth Economy
last question.
On a scale of one to ten, what do yousee as the likelihood of a Nixon Mao
moment emerging betweenPresident Trump and President Xi?
Trump is not Nixon, and
there's certainly noKissinger alongside Trump.
Mao, Xi Jinping is not Mao,and that may be good.

(54:24):
That may actually be better.
I think China may actuallywin on that trade.
I don't think we win on that comparison.
So the chance that there'llbe a fundamental reset
that will lead to eight to tenyears of assessing each other and
lead to much more positive outcomes,the chance is less than 10% to me.

(54:45):
I think the Trump administrationhas grossly overestimated,
overplayed its own hand.
I think that, you know, they pay, don't.
They don't pay attention to the fact thatthere are $20 trillion worth of savings in
Chinese accounts.
I don't think they pay attention tothe fact that the Chinese people
are incredibly gritty andable to really grind through pain.

(55:08):
So Xi has on his side a groupof people that are very,
very capable of withstanding pain andsuffering.
They don't like it, andit's certainly not sustainable forever,
but I think it's much more sustainablethan what we have in the United States.
And trust, to me,the US has always been based on trust.
Our entire systems are based on trust.

(55:29):
And trust comes from predictability,and it comes from the laws.
What we're doing now is we're actuallytaking away the predictability.
Trust erodes quickly whenthere's no predictability.
That's always been the weakness of China.
With the capital markets,you couldn't predict.
Well, right now, I'd have to saymaybe China is entering a period
where it's going to be more predictablein its behavior than the US.

(55:54):
That's a problem for the US.

So, Gary, on that note, let me thank you for
a discussion that was filled notonly with information that I think
is extremely interesting aboutthis state of venture capital.
But really I think filled with wisewords about how we should be thinking,
we in the United States should be thinkingabout who we are and where we want to go.

(56:21):
And about the nature of the competitionwith China and how ultimately we can
in fact emerge as a continued leaderin the innovation space and then some.
So if you enjoyed this podcast andwant to hear more recent discourse and
debate on China, I encourage you tosubscribe to China Considered via
the Hoover Institution YouTube channel orpodcast platform of your choice.

(56:44):
In the next episode, I'll be speaking withMichael Dunne, one of the world's foremost
experts on China's auto industry willhelp us understand how China got where
it is today and whether the US Autoindustry can still be competitive.
Thank you again, Gary.

My pleasure.

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