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China engineer-turned-venture capitalist sees opportunities in ageing workforce and new tech

By Daniel Ren.

John Wu, an engineer who is treading a new path as a venture capitalist, has faith in matters of a cyclical nature despite feeling queasy about the mainland’s intimacy with thriving internet-related businesses.

A former chief technology officer of Alibaba, Wu now sits at the head of FengHe Fund Management as chairman. He contends that China’s path-breaking experiment to enact economic and financial reforms should be based on expectations of a shrinking workforce, not just by raising its bets on the new online-to-offline (O2O) commerce models sweeping across the country, models he has some qualms about.

FengHe focuses on early stage start-ups.

“Internet technologies have proved to be a great thing to make the world better for people, but not all models based on them are well founded,” he said. “In China, business success hinges on the capacity to overcome the looming labour shortage ahead.”

The size of China’s workforce, those aged between 16 and 59, is likely to fall more than 23 per cent by 2050, according to the Ministry of Human Resources and Social Security.

By that date, the working population in China will fall to about 700 million from the current 911 million, increasing pressure on the world’s second-largest economy to enhance productivity to deal with the problem of age.

“It’s obvious that ageing will be the enemy within facing China’s economy in the coming decades,” Wu said. “The potential tremendous demographic change means that a new cycle is taking shape and investors must adapt to the changes to sniff out opportunities.”

Wu singles out service robots, artificial intelligence and automation as the new bright spots that have huge growth potential in the world’s most populated economy.

His views add a layer of divisiveness at a time when debates over the prospects for the world’s second-largest economy are escalating.

The country’s leadership predicted that China’s economy would move in an “L-shaped” trajectory for a long time following three decades of breakneck growth buoyed by cheap labour and massive asset investment.

As the economy slows, the central government will have to embark on a productivity-led growth pattern to ease economic and financial stresses.

To this end, Beijing has highlighted the Internet Plus strategy, hoping to capitalise on the internet’s rapid penetration into people’s lives to bolster domestic demand and enhance business efficiency.

However, some analysts are forecasting a hard landing for the mainland economy, citing high leverage ratios, mounting bad debts and excessive product stockpiles as the main forces of drag on the economy.

“The mainland economy will continue to grow on a relatively fast track for 10 years,” Wu said. “After that, the shrinking size of the workforce will have to be dealt with to combat a woeful slowdown.”

To illustrate his point: Wu uses a food delivery analogy to shed light on the coming impact from the labour shortage.

“Customers order food via their mobile phones, but restaurants find that they have no manpower to deliver the food,” he said. “This model will hit a dead end when the working population dries up.”

Wu, 49, earned a bachelor degree of computer science at University of Michigan in 1989.

As an information technology engineer, he worked for companies including Yahoo and Oracle before joining China’s e-commerce giant Alibaba and assuming the role of chief technology officer in 2000.

Alibaba owns the South China Morning Post.

In 2008, Wu moved on to join Northern Light Venture Capital as a partner with the fund house.

Two years later, FengHe Fund Management came into being.

“I wanted to be my own boss,” Wu said. “Doing investment will be my last job.”

Today, FengHe’s portfolio includes companies such as Huazhu Hotels Group, online cosmetic retailer Jumei, housing data provider Fangjia.com and online medical consultancy Guahao.com.

“Cyclical is a key word that venture capitalists should fully understand,” Wu said. “The next wave of investment opportunities lie in businesses that can give customers greater convenience.”

He likened venture capital investment to surfing, underscoring the importance of catching the wave to make all the right moves.

“It’s not about having the technology chops that hold the key to success,” he said. “On the contrary, it’s about demand from the people that leads to necessary technological innovations to create successful businesses and new lifestyles.”

The search for innovation led FengHe to invest in Israeli robot maker, Robotteam.

Wu said that robots for household use costing less than 10,000 yuan would be launched by Robotteam in China next year.

However, it is about peer-to-peer (P2P) lending and O2O food delivery services where he sounds notes of caution despite the enthusiasm surrounding the businesses amid an influx of investment funds.

Venture capital funds focusing on China suffered a setback this year following a fundraising and investment spree in 2015, with dozens of start-ups facing liquidation amid business failures.

Customer-focused O2O models were greeted with fanfare and enthusiasm in the past three years as investors and entrepreneurs gravitated to e-commerce, car-hailing and food delivery businesses in order to tap the rising demand of China’s populace for decent food and services.

Typically, an O2O business uses internet and mobile internet technologies to reach out to a wider range of potential customers while delivering their goods and services off-line.

China’s economy expanded at the slowest pace in 25 years last year, battered by dwindling external demand and slowing infrastructure building.

Global consultancy McKinsey said China was shifting to a new approach centred on productivity after a 25-fold expansion of the economy since 1980 through investment-led growth amid urbanisation and industrialisation.

The transformation of China’s economy will add US$5.6 trillion to the country’s gross domestic product in 2030 with household incomes increasing US$5 trillion, according to the consultancy.

Digitalisation is unanimously seen as the gold standard by which China will sustain its growth and upgrade people’s living standards.

Premier Li Keqiang is pinning his hope on internet technologies to help redraw the mainland’s economic and financial landscape as state-owned juggernauts have for too long played a dominant role in the mammoth market.

Meanwhile, P2P lending was an area that drew huge amounts of funds and rave reviews with its potential to technically break the monopoly of state-controlled banks – many of which were reluctant to extend credit to small firms and individuals.

Peer-to-peer lending is the practice of lending money to individuals or businesses where a company acts as a matchmaker between borrowers and lenders.

However, the boom in P2P businesses – there were about 3,000 players across China – did not live up to expectations.

Indeed, dozens of players collapsed under alleged fraudulent fundraising, leaving thousands of investors to lick their wounds.

Wu was blunt about such lending.

“Without an asset pool like the banks have, P2P operators won’t be able to cover the risk of default even if no fraud is involved,” he said. “This is the business that FengHe resolutely shuns.”

At present, FengHe manages combined capital of US$300 million.

Wu said FengHe was not the kind of company that chased fund-size growth because having a large pile of capital in hand is one of the things that can lead to reckless investments, wrong bets and possibly even ruin.

See full article here.