Venture Capital in China with Gary Rieschel

>> Elizabeth Economy: Welcome to China Considered, a podcast that brings fresh insight and informed discussion to one of the most consequential issues of our time, how China's changing and changing the world. I'm Liz Economy, Hargrove Senior Fellow, Co-Director of the program on the US China and the World at the Hoover Institution at Stanford University.

Today, I have with me, Gary Rieschel, who's founding managing partner of Qiming Venture Partners, a venture capital firm that he started with his partner Duane Huang in Shanghai almost two decades ago. Gary is one of the most knowledgeable and successful VC investors in China, and I'm delighted to have him with us today.

Welcome, Gary.
>> Gary Rieschel: Yeah, good morning, Elizabeth. Thank you. It's a pleasure to be here.
>> Elizabeth Economy: So, before we dive into all of the hot topics of the day, like whether China's already surpassed the United States as the world's center of innovation. Or how new US Investment restrictions might affect venture capital opportunities in China, let's get a little bit of historical background.

You started teaming in 2006, well before many big Western VC firms even thought about investing in China. What made you think that China was the place to be?
>> Gary Rieschel: 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 up SoftBank China Venture Capital in 1999. And then in 2001, as part of a buyout of a joint venture that Cisco had with SoftBank, we set up a fund called the SoftBank Asia Infrastructure Fund, or SAFE. And those two gave me SoftBank China gave me a very early look.

SAFE gave me a look at the consumer market because one of its most successful investments was a company called Shandot, which became a very large game gaming company there. And then I also helped set up a fund with a gentleman named Feng Bo and his partner, Chris Wadsworth, and that was in 2004.

And Feng Bo wound up marrying the 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 three operating venture capital funds pretty much before anyone in the west had too much experience or exposure to that.

>> Elizabeth Economy: 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 of challenges that you encountered? Again, being a pretty early investor.
>> Gary Rieschel: So some of the challenges that were immediately obvious was there was no infrastructure at the time to Support venture capital in Silicon Valley.

You had 40 years of accounting rules and regulations, you had all this legal experience, you had deep knowledge on generations of entrepreneurs who would give you reference support as you were looking at investments with other entrepreneurs. So you could cross reference quite a bit. There was none of that in China, so it was really greenfield, the accounting.

Even by Chinese standards, it was ambiguous. China celebrates ambiguity in many ways. But even by Chinese standards, the accounting systems, the legal systems were very ambiguous, and you had to be very careful on references because when you called someone on a reference, the answer was always, they're a nice guy.

And it was something where you really had to form a network of people that would tell you the truth about people. And that partly I had an advantage with that because people trusted me because of what I had already done. And so that was one of the major issues that came up.

The VIE structure in terms of what you were actually investing in.
>> Elizabeth Economy: VIE means.
>> Gary Rieschel: The variable interest entity structure, in which it was illegal for a foreign firm to actually have an Internet license, they treated it like a media company. So it was illegal for a foreign firm to actually own a license that was promoting content directly to Chinese consumers.

So you had to set up an entity where a partnership or a partner in China held that license and the offshore entity had a subsequent agreement with them to 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 companies in China were under that and it wasn't prohibited, but it wasn't expressly permitted.

So you were investing in a legal entity you weren't sure of the long term viability of, so that part was a little bit interesting.
>> Elizabeth Economy: Can I just ask who was your Chinese partner? Who?
>> Gary Rieschel: So Qiming didn't need that, but any company we invested in that invested dollars.

>> Elizabeth Economy: Okay.
>> Gary Rieschel: Had to have that, had to have that. So Qiming didn't need to have anything like that. Dwayne, as you mentioned earlier, was my partner. But so, but the companies we invested in that were doing anything on consumer Internet needed to have some kind of relationship like that.

>> Elizabeth Economy: Okay, I see.
>> Gary Rieschel: And then, there were other things, the government regulations. There were four different entities that were trying to govern VC at the time and they had conflicting guidelines. So you got to pick, you kind of had to pick which ministry you were going to be in violation of today when you were setting up the funds.

So it was like that prehistoric soup of primordial ooze that you're basically figuring out how it's gonna coalesce.
>> Elizabeth Economy: So you must have figured it out pretty well because I know you had some pretty high profile successes. You want to talk a little bit about those?
>> Gary Rieschel: Well, so the firm, the key thing was actually finding a partner.

I always find it entertaining when people say 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 of human being that you can't partner with. And I just totally reject that, I'd known Dwayne for a number of years.

I interviewed several different VCs, several different people when I was in China to see who would be a good fit. And Duane was clearly, you know, the best fit and turned out 20 years later to have been a very, very good decision. So that was really the key thing that one had to do.

The other things we did was we insisted, I should say I because at the time I was quite a bit more senior than Dwayne in the overall industry and I insisted that everyone's compensation 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 was we focused on sectors. So instead of having everyone try to do everything, we anticipated that having deeper knowledge as China, as the investments became more technical over time having more knowledge in technology areas would become more important.

So we had a consumer Internet sector, a core technology sector. And then quite unusual for the time time we invested in healthcare and set up what became China's largest healthcare investment operation. So those were things that we spent a great deal of time on, you know, at the beginning and I will say that the maybe one of the proudest pieces of the Qiming story to me is how the culture has actually lasted 20 years and is really celebrated by the senior people in the firm.

That, that actually has been phenomenal. The deals. The deals are the deals. We had one of the real foundational Companies for Fun 1 was a company called TigerMed which was the first clinical research company in China to offer the same level of standard and analysis for conducting clinical trials on new pharmaceutical products.

Became it was the first company that we 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 and who doesn't read Chinese actually has to take the Chinese Security Regulatory Commission test for a board member to list this on the Shenzhen Stock Exchange.

It was a pretty hysterical process. And I would say that.
>> Elizabeth Economy: Wait, I wanna know what you scored.
>> Gary Rieschel: Perfect score, of course.
>> Elizabeth Economy: Okay.
>> Gary Rieschel: 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 can learn things from the Chinese and how they do things. They came and they interviewed me for two hours on Tigermed's business. We went through what the gross margins were, we went through what the risk factors were. We went through all these different things in order to be a director of a public company in China.

I would submit to you we might not be badly, we might be a little better off if people in the US had to go through those kind of tests. They had some clue of what the business was they were sitting on the board of. So fund one had Tigermed and that returned the entire fund.

And after several years, fund two wound up being quite special. It had two huge hits. One was Gan and Lee, which was a diabetes drug company, which had a funny story. Our partner who was running the healthcare practice couldn't get a meeting with the founder. And it turns out that one of our best friends at school, there's our sons, were together in class and over 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 and we set up a meeting. And so that returned a billion dollars to Qiming and then Xiaomi. And Xiaomi, of course has become one of China's iconic tech companies. And the founder, Lei Jun, did a spectacular job.

Duane did a spectacular in advising the company over many years. And so each fund has had those kind of successes. So we're raising our ninth dollar based fund now. We can talk about dollar fundraising now versus RMB later. But the team has done a spectacular job. How many people do you employ today just to give a sense of how big you are?

100 people. And we have, including a guidance fund we manage for the Chinese government. The team in China manages for the Chinese government. It's about $12 billion.
>> Elizabeth Economy: I'm just curious, you know, when you first started out and you were hiring people, clearly there couldn'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 for in the younger Chinese that you hired?
>> Gary Rieschel: That's a great question. And I think that VCs get quite full of themselves. I always find it quite humorous when a VC says, 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 keep the perspective that you're a service industry to support entrepreneurs. That's what we recruited for. So you recruited for people that had the mentality 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 and add value and support the CEO.

That was the primary requirement. I've always recruited, for the last 40 years, I recruit for two things. One you can know and one 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 generous until you've worked with them.

And for me, generous was equally important in some ways, maybe more important than being curious because there is a way of thinking, of being able to inconvenience yourself that if you're in a service industry you have to be willing to do that. And so those are really the key attributes we look for.

They had to be smart. Lots of smart people in China and good investors. Venture investing is hard. We had one partner who was what I would call a very, very good investor but he could not do really early stage deals. And so we parted company. I mean, if you pass on ByteDance twice without showing it to you, without showing it to your partners.

I'm sorry, I'm sorry. There's a cost associated with that.
>> Elizabeth Economy: Yes. So just it's what you're saying is it takes a certain skill set to recognize the potential at an early stage that not everybody has.
>> Gary Rieschel: I think that's right. I think that's right. Especially if you're doing a team oriented approach, which means you're not just going to have one person making all the decisions.

And again, one of the things I was very careful about with Duane was it made no sense to have Qiming revolve around an older white guy who at some point was going to leave China. The dream was Qiming was going to last at least 30 years. We're 2/3 of the way there.

And so I think the idea that we really always organize Qiming around what the next generation is gonna look like, that's really held us in good stead.
>> Elizabeth Economy: Yeah, and obviously it's paid off well. So if you take a step back and you look at the overall landscape of Chinese venture capital, you know, what do you think of as sort of the landmark moments in the evolution of the space, you know, since you started working there, up until now, either positive or negative, were there moments when you saw just like big inflection point in how the industry was developing?

>> Gary Rieschel: I think that certainly the 2005 timeframe, there were quite a few groups that started to talk about it started to come together. There was a, there was a Silicon Valley bank trip in 2003, 2004, I think that brought over a bunch of the senior VCs and I remember having dinner.

We're sitting on the Bund and you'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 radar screen as an investment opportunity.

I was the only senior VC to ever really move to China. Some people would spend a couple. No one else from Silicon Valley ever moved to China and stayed there for any extended period of time. However, 2005 also had the formation of Sequoia China. And I have to give full credit, Neil Shen without question has created the most successful investment platform in China.

They deserve all the credit and he deserves the credit for that. You also had Kathy Hsu start Capital Today. You had Deng Fung start Northern Light. And I was involved in all of those different discussions in one way or the other. GGV Ji Xun Fu and Jenny Lee came together.

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 formation of those firms, the willingness of the foreign firms to hire local people and not have them run from Silicon Valley, you could look at that as a formative decision point in terms of how firms were thinking about being in China.

I think if you look at healthcare, the success of Tigermed fundamentally changed China's healthcare industry cuz foreign pharmaceutical firms coming to China never had a partner like a quintiles in the US that could conduct. Trials at a global level, global quality and analytical level. So before we invested in TigerMed in 2007, 2008, 95% of TigerMed's trials were for generic pharmaceuticals within the Chinese market.

Within five years, 95% of his trials were for novel pharmaceutical products into the Chinese market. So just the entire business flip. So creating that capability was definitely there. I would say as you get into this 2008, 9 and 10 time frame. E-commerce, when Alibaba did two things that fundamentally changed the face of E-commerce, basically globally.

Number one, when they went after ebay with Taobao, the launch program, spectacularly successful. SoftBank was heavily involved in supporting them in that. Because the market they were selling into, China is a low trust society. The institutions haven't established a great deal of trust with the Chinese people. So with E Commerce, you're asking someone 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 to return it if they don't like it.

So what Alibaba did is in the early days they went to the courier services, they were having trouble. They were having a lot of complaints by customers. Not timely delivery, very awkward to return things. They told the couriers, you will pick it up within these windows or you don't work for us.

You will deliver it within these windows 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't like it fundamentally changed. I mean, when a company establishes trust in a society, that company usually winds up being very successful.

Second thing they did Alipay. And when you look at the genius behind Alipay and 10Pay later with 10cent, 97% of all banking transactions in China before that were done through the banks, UnionPay, etc. Ten years later, 93% were done without the banks 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 me is the example I use with US government officials. Do you think the Chinese government told Alibaba to do that? Do you think this beautiful central planned economy, this was no, they were gutting the banks. So this was something that.

It's a perfect example of the entrepreneurial driven success that China's had in its economy. Not a centrally planned economy in terms of bad things. One that doesn't get enough attention. 2015, 16, China had a fairly significant market collapse. And Xi Jinping, the champions team came in, they went, were buying stock, and they tried to forestall the collapse.

It didn't work and it kept getting worse. And, and I've been told by people that have met Xi numerous times that that really created a problem for him that there was a market, there was something inside China that he didn't control that could have material impact on the, on the, on this, on the harmony in the 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 mechanisms to really make a lot of the decisions for him, it also, the VCs missed it, Qingming missed, everyone missed it. When CSRC started to become far more regulated, they had been opening the stock market up, pursuing a US listing orientation, and then it became CSRC approving the listings between 2018 and 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 liquidity has generally been very, very poor. So the foreign money that's gone into China is stuck. The R&B money that went in is stuck, so you have a dramatic constipation problem on the back end of getting these companies into the public market.

And that's the part that when the regulators become that involved in the public markets, if you're a stock broker, if you're buying stocks, how do you trust that that's a real market. And China has yet to really establish trust in its entire capital market structure. Sorry, I went on for a while.

>> Elizabeth Economy: No, that's great. I mean, and it, it brings up another question that I had, which is, you know, Xi Jinping has placed a lot of importance on China's rise as a technology power. He's invested, you know, had the central government invest hundreds of billions of dollars. But you're pointing out that in technology innovation and that's advanced manufacturing.

But you're suggesting that the regulatory structure that the government has put in place is, is actually really constraining the opportunities at this point for more, you know, venture money to go in, probably private equity money to go in. Certainly they must realize that they have a problem. And you know, Xi Jinping has been on this big campaign recently talking to all these, you know, head CEOs of companies, saying we're open for business, we want your business.

Does that just not apply to the venture world or is it simply that they're open for business? But they're not planning to change any regulations or anything that's actually going to make things open up.
>> Gary Rieschel: Well, we can go back and look 30 years ago when they had the 863 program that was targeted at the automobile industry and avionics.

And 20 years later, was anyone buying, anyone outside of China buying a Chinese internal combustion engine car? No. And so the government led. And then you look at the hundreds of billions of dollars blown up in their semiconductor initiative with not nearly as much to show for it as they would expect.

So when the government picks, when the Chinese government or any government has tried to pick sectors to develop, it's almost irresistible for them to not also pick companies. And the two things that China made a mistake on was they were picking state owned enterprises and JV partners with U.S. automotive makers, European automotive makers.

And those weren't terribly innovative organizations. And when people talk about IP step misappropriation, theft, et cetera, a lot of it really did come from that time during the, during the 90s. And then you look at the, the semiconductor, the amount of graft and corruption that they uncovered with people in 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, it evolved in China because foreign firms set up labs in China, sent thousands of extremely well trained engineers and scientists back over and five years later they were doing what the Chinese are very good at and they said, let's start our own company.

And you wind up having all these spin outs. And that created the innovation engine in the biotech world. So it's not that the government policies, the direction at the beginning saying go innovate, they tried to use the state owned enterprises. That's a problem. The state owned enterprises are 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 held the meeting recently with the 30, 30, 31 tech leaders, I. I doubt very much whether six months ago he was thinking that was a great thing to do. I think he was thinking we really, really need these state owned enterprises to step up.

And after 10 years and hundreds of billions of dollars, he had bupkis, nothing to show for it from the state owned enterprises. And so if you didn't figure out how to bring the private enterprises into 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, the most important thing that came out of that meeting was something that was not really covered that well in the US press. Two days later, sasac, which is the organization that manages all the state run assets, as you know well, issued a directive, not a suggestion, a directive to every state owned enterprise that they were to adapt AI based technologies as rapidly as possible.

So they basically, because there's been no enterprise software market per se in China, you know, if you look at the 50 largest companies, enterprise software companies in the world, maybe two are Chinese in terms of true software company Tencent, you include Tencent, but it's really a gaming company.

So same thing in the large pharmaceutical companies. So the fact that the state owned asset bureau said you will adopt these technologies and those technologies are going to come from private companies, they're not going to develop them themselves. That's a pretty power. Because what it does, it creates a new platform to leapfrog the last 30 years of enterprise software development and put 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 sitting here with the US education system. The unions are saying, well no, we don't want the kids to use AI because they cheat, okay?

But there are a lot of tools for the teachers. We're not, and my son teaches physics at high school, they're not letting him even use 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're pushing from behind, they're not leading it, they're not directing it, but they're pushing from behind.

They can be very powerful.
>> Elizabeth Economy: Right, and what you're talking about really is the deployment of the innovation at this point, right? You're not talking about the innovation itself coming from the government. You're talking about basically creating a market for those technologies throughout, as you say, the educational system throughout, probably government offices.

So that's great because that's also just going to boost the opportunities for those Chinese companies.
>> Gary Rieschel: That's exactly right. And another example, a lot of folks in the us a lot of people in the venture community commented on the crackdown on private enterprise in China. And I actually disagree with that as a premise because the private companies they cracked down on were quite specific and there were very specific reasons for that.

The online tutoring business or home tutoring. Well, number one, all the people doing the tutoring, or many of them were teachers who are already being paid by the government and they're making a lot more money tutoring than they were teaching. So the government didn't like that. It also didn't like the fact that they were teaching curriculum that the government didn't control.

So again, they approach it from a control perspective. 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 era of Xi Jinping thought. And you're not allowed to free speak quite as freely as Jack did.

And so he was put in the penalty box for a number of years. Tencent they restricted the amount of time that people could play games. Maybe that's another idea for the US that wouldn't be the worst idea that you can only use Douyu and you can only use TikTok a couple days a week if you're under a certain age.

You can only play games a certain number of hours if you're under a certain age. Some of these ideas are really not bad when you look at the concerns that people have in the US about online gaming, social media, et cetera. But again, these were fairly isolated, they were powerful and they had rippled effects.

But it's not like they went to every Chinese entrepreneur and said don't innovate or stop being an entrepreneur. We don't see.
>> Elizabeth Economy: Exactly. I think that's really, really important point. One of the things when those, when that crackdown happened that occurred to me is what, and it's you to your point about control, is that really what they cracked down on were those industries that dealt with the free flow of capital and the free flow of ideas.

And those are things it's not about, you know, innovation in biotech, for example. They're not cracking down, you know, in that space in the same way nonetheless.
>> Gary Rieschel: Exactly, that's exactly right.
>> Elizabeth Economy: 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 just the inability to get, you know, money out.

What else is going on, what needs to shake loose where sort of describe what you see as the venture landscape today because it seems to me it's changed 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.
>> Gary Rieschel: What does it look like today? It's definitely evolving. I would say the transition time really occurred during COVID when foreigners were not really able to or certainly chose not to go back and forth to China. China had shut itself down. All sorts of social repercussions came out of that.

But on the, in the venture side, a lot of the, not a lot of the knowledge based people that would go over and talk to startups weren't spending their time doing that as much. Another thing that happened was, you know, you had the beginning of the geopolitical during the first Trump administration, you had some of the geopolitical concerns being expressed.

Biden took some of that. You know, you worked with Secretary Raimondo. You know, I thought that Biden did a serviceable job in his administration in institutionalizing a number of the things that Trump may have said. But Trump doesn't institutionalize things, whereas the Biden administration actually institutionalized processes around some of the restrictions, the semiconductor restrictions, and so on.

So I think that there were a number of those things that, that had kind of cause people to hit the pause button. But the single biggest issue is the liquidity side. We have numerous LPs in Qiming that their venture allocation now is, exceeds their entire private equity model, private equity and alternative asset model.

So you have someone who's 32% invested in Venture when 23% was supposed to cover Venture PE, hedge funds, et cetera. So that's a problem. So the US IPO market having difficulty the last several years. China basically shut down its IPO market for 18 to 24 months. And so that combination, you have all this capital that's trapped.

I would submit there would be a different conversation on a lot of the geopolitics. If the liquidity markets in China had kept a pace and had continued to that, you'd have a lot of institutions saying maybe we will continue, we will invest less in China, but we'll continue.

You'd have the geopolitical umbrella is a very convenient umbrella to hide under and say that's why we don't want to invest in China because large pension and endowments don't want to say publicly we kind of blew our model apart and we don't have liquidity, so that's why no one's going to want us to come out and publicly say that, so.

I think that that's really one of the things that's not getting enough attention. The liquidity side really to me is the primary issue. The geopolitics. The semiconductor industry spoiled the government in Washington DC, because it allows for choke points. And if you control access to the technology in those four or five choke points, you really can throttle back someone's development.

AI is not like that. Biotech is not like that. So when I'm on these working groups and they say, well, we want to constrain Chinese ability to develop AI for two years I was saying that 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. A case comes out and says, we happen to have a drug that's better than Keytruda. That's now first in class. Sorry, not first in class, but best in class cancer drug. And so I think that when you pick your babbles on technology restriction, you need to be very realistic as to what the structure of that industry is and what it is you're really capable of constraining.

And I would submit that AI with the US The US needs to focus more on, as you mentioned, what I call diffusion of this technology in schools, in companies, as rapidly as possible, and then also around the world because there's still 4 billion people who don't have access to the kind of technology we take for granted.

And the US needs to be the leader in helping them get access to that technology over the next decade. That's where leadership will come from. It won't come from trying to constrain someone else from developing it. Not possible.
>> Elizabeth Economy: Yeah, I honestly couldn't agree with you more. I think we spend much too much time trying to think about how to slow China down and not enough time thinking about how we enable ourselves to run faster.

I mean, I often think about it as. As if you are actually in a physical running race and are you spending all your time looking behind you to see, you know, is that person catching up and trying to think about whether you could try to trip that person and stop, stop him or her, or are you actually just focused on crossing that finish line first?

And I think over the past eight years, and certainly now, I think I'm quite concerned that we're much more focused on that, trying to slow down as opposed to trying to enable ourselves to run faster. So let's talk about that sort of state of the competition between the United States and China, that the Australian Strategic Policy Institute, known as ASPI, has received a lot of attention for its Critical Technology Tracker.

And it basically looks to see how many papers are being published by researchers in a country that are called high impact research papers. And now it says China is the number one in 57 out of 64 areas of technology. Robotics, advanced materials, biotech, cyber. Do you think that this is a useful way of framing sort of who's leading in innovation?

Do you think it's an accurate assessment of the state of, you know, competition, if we want to frame it as a competition? Competition between the United States and China, how do you understand that kind of data?
>> Gary Rieschel: I think that data, what it does point out to me the big takeaway from looking at that is maybe we shouldn't be using the federal government.

We shouldn't put the federal government in a war against the universities and research institutions and saying that if 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, the kind of things you're talking about, that's where they come from.

And we've now pretty much declared that a number of our top institutions are not going to be supported by the federal government in the way that they had been in the past right at the time where I would submit to you, it's probably more important than ever. If you're really viewing China, us as a competition, then that's one of the areas of competition you have to at least be equal or hopefully better in.

I think that the quality of Chinese research has improved dramatically. When we used to look at things 20 years ago and meet with the Chinese Academy of Sciences, there was frankly, very little. The entrepreneurs were generally ahead of the research institutions in terms of certainly how to use technology.

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, they try 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 the early days was it did software releases every week.

American consumers would go crazy if Apple said every week you have to have a new software update that can take 15 or 20 minutes. But what Xiaomi was doing was they were also soliciting input from all their consumers and they'd roll those into the next releases. It was phenomenally successful.

So the Chinese, the ability of that society to adopt technology, very similar to the language. You can look at the, you can look at the 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 both Cantonese even when they Mandarin very, very quick and good at that.

English is very good at that. There's a reason why a lot of other countries don't adapt. Their language actually is reflective of how the society is organized. And I think that at the very broad basis we don't appreciate the value of a society that is so willing to take new things and adopt it.

600 million people have downloaded AI apps in China. My God. 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?
>> Elizabeth Economy: 200 million.
>> Gary Rieschel: 200 million.
>> Elizabeth Economy: Okay, so roughly half the population.

That's not so bad.
>> Gary Rieschel: No, no, I'm not saying it's bad.
>> Elizabeth Economy: 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 this point about how China innovates and how how it adapts technology is really important.

So just describe if you could in sort of in short form China's innovation ecosystem. Because when we think about something that 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 collocates universities and, and sort of innovation ecosystems and manufacturing and all the different parts of the ecosystem.

Do you see something there that the US should be considering?
>> Gary Rieschel: I think that the US has quite a, quite a bit of the similar. In fact, I think a lot of the Chinese co location model was Adapted from the U.S. you know, you look at Stanford, you look at Berkeley, you look at Illinois, Tex.

Pick any one of these major universities in Boston. There's very robust entrepreneurial ecosystems around those universities. And the thing that the US had always been very good at is commercializing those technologies. Well, it turns out the Chinese entrepreneurs 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 started in the US and now moved to China. And it moved to China at some pretty significant scale in a number of the major universities.
>> Elizabeth Economy: You don't see a difference in terms of the manufacturing ecosystem?
>> Gary Rieschel: 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 called the ant farm in Beijing, I don't know if you've ever visited. It's about 40 companies that are probably co. Located in an area the size of our house. And during the winter, the heat isn't turned above 55.

And during the summer the air conditioning is 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 steroids without nearly the capital. And so software can be developed that way. Hardware cannot, hardware requires prototypes and it requires actually the manufacturing process.

And again, since China now has a third of the manufacturing in the world, they have a very, they have a vast and varied capability there. So when you look at the innovation engine, the invention still primarily comes outside China. The, the completely first, first in class. Something becomes, is coming from outside of China.

But then first in class doesn't win the dollars. They get 10%. The best in class get the other 90%. The Chinese are very good about 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.

And they're very quick at that. They're very quick at that. In tech, the manufacturing base allows them 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 of license fees were paid to Chinese firms last year by global pharmaceutical companies.

It's because their labs aren't generating the products they need. And the Chinese scientists are. There's unprecedented cooperation between global pharma and Chinese startups in biotech development, unprecedented. And so that's something that we tend to be quite intimate with on both of our, both the US and chimney 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 the US is going to have to figure out how to, how to adopt or how to create. Doing it at scale is hard.

There's a reason why Apple looked at 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 concept to a car in production that the CEO of Ford says is a very, very, very good Car.

How could they do that? Xiaomi has over 50 suppliers of analog motors and wheels and all sorts of devices to run all of its entire ecosystem of little vacuum. And you think like, well, that's not the same as a car. Actually it is, because electric vehicles are like LEGO components.

You take these 10 components and put it together and you have a car. I'm exaggerating. An internal combustion engine car, 2000 more different components. That requires a lot more sophisticated robotics, a lot more sophisticated human manufacturing capability. EVs are toolkits. And so three years start to finish, versus six by arguably two of the most innovative companies in each society.

And I would submit, Xiaomi, people are not smarter than Apple. No way. But their ecosystem is much more responsive and much more capable of moving into different areas like that.
>> Elizabeth Economy: So is that something realistically that you think the United States could develop or should we be looking to have ecosystems in other countries?

Are there other countries where there are going to be the new China, do you think? Is there, is, is a country waiting in the wings that we should be focused on given the, given the geopolitical realities of the moment, you know, as you're looking across the globe, are there other places that you're looking?

>> Gary Rieschel: So when you say given the current geopolitical realities, I would say there is no hope of the US ever being successful in this. I am hoping that the current geopolitical realities are not the driving force for too much longer. If I think about how would I compete with China if we're playing the game, 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 good part of China's manufacturing ecosystem. In fact, they already have. Why are we treating them as adversaries? 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 of need from the outside world for water, energy, food, et cetera. It's nirvana as a market and we treat it as second class citizens. So if I look at the inclusion side of diffusion. The inclusion side is there is.

It's inexcusable that the US doesn't have a 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 of supporting the overall wealth and wealth creation in those two continents. And I don't think it's that hard to figure this out?

I'm not the first person probably to come up with this, but we're making it really hard.
>> Elizabeth Economy: Yeah, that's for sure. I mean, I do think the Biden administration in the Chips and Science act had $400 million to basically dole out to other countries to be part of the semiconductor manufacturing supply chain.

And Costa Rica is one of the countries that was a beneficiary. Whether that sticks, given current administration policies, I think is not clear to me. But I think this is, you know, a very wise suggestion. And maybe once things sort of even out after this flurry of activity from the new administration, maybe that kind of advice might be.

Might actually be heard.
>> Gary Rieschel: Well, I do. Sorry. I do think that the other thing that's changed, and this is just how I think about how do you create gravity? So 2014, China's GDP was 10.8, $10.5 trillion. And the top eight tech companies in the US were worth about 1.5 trillion, 15% of that.

Today they're 100% of it. 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 States had 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 is they are the ones who are going to. Governments do not diffuse technology. They set guidelines for the diffusion of technology, companies diffuse technology. Companies can also be the ones to drive inclusion in new markets and new people who haven't had access to it.

That's where the US Government should be spending its energy, is figuring out how to work with these companies in new technology areas to both propagate the technology and also make sure that people who've never had access to it before get access to it in the future. We are not thinking that way right now at all.

>> Elizabeth Economy: No, we're not. I hope we don't have to wait another four years until we start thinking that way again, because by that point it might be game over or we're moving very, very.
>> Gary Rieschel: It's never game over, it's never game over. But it can certainly be a very inconvenient time.

>> Elizabeth Economy: Yeah, at some point, the game does end, though. Okay, let me just ask a couple of quick last questions that I ask to every guest. What book or article on China would you recommend? If you could recommend one that people should read to understand the country.
>> Gary Rieschel: To understand the country, that's a-

>> Elizabeth Economy: Or the US-China relationship, or just something that you think is important.
>> Gary Rieschel: The book that I actually think explains a great deal of China is an older book, is by Sid. It's Sidney Rittenberg's autobiography named The Man Who Stayed Behind. And it tells his story of joining the Chinese Communist Party, being in prison twice, running the Chinese radio station, coming out, and then advising Greenberg, advising Intel.

So it's a good story of someone who went on a very, very long personal journey and really experienced the best and worst of Chinese society during the period of Mao and through the Cultural Revolution. I think that that, to me, is a. I mean, again, if you want to understand China, I mean, I think that your books on Xi Jinping, Kevin Rudd's books on Xi Jinping, critics, Chris Miller's book 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 captures the essence of what it was like to be in China when the current version of China was created.
>> Elizabeth Economy: That's a great pick. What issue do you think we don't understand enough about China? What do you think we kind of get maybe wrong?

>> Gary Rieschel: 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 elected officials, they would love to have China be a central planned econ so they can say, that's what we need to do.

It's not, and it's not what we need to do.
>> Elizabeth Economy: Okay, but now you forced me. So do you think just Act is not a good thing? Now you opened a big door to me, having worked in the Commerce Department right at that moment. Do you think that that's the wrong way to go then?

>> Gary Rieschel: No. There's a difference between looking at tactics 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 and live and live and study in the US. Those are very, very important tactics as we look forward to recreating the technology society in the 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 US Government is going to pick the winners. And so the guidelines, the incentives, those are great things. But you shouldn't be invested in who the winner is or what the winner is, and I think that's a distinction.

The US Government likes to think that China actually, no one's good at the latter, no government's good at the latter. You can be good at the former.
>> Elizabeth Economy: So that's a good, a good list of things for the Trump administration to consider in terms of how it can help the US Continue to be a leader in innovation.

Is there anything else you want to add to that list? If you had President Trump's ear right now, what would you say? This is what we really need to be doing, Mr. President.
>> Gary Rieschel: In the spirit of not wanting to get too down the political rat hole, technology carries values with it.

So when you distribute technology around the world, I do believe values go with 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 parcels going back and forth, what is that trade really doing?

What's the trade really doing to better the American, for the American worker, lots of things can be done. But planning on reshoring automobile plants 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, we're gonna use robots.

It's like, okay, well, good, he's at least being honest that this isn't gonna go the way that people are talking about. So I think that you have to start with the values. What are the values that you're really trying to propagate around the world? If you win that, if the values that go with the technology are the long term good values for America, America's going to win and it will win huge.

And I see the current administration paying no attention to that whatsoever.
>> Elizabeth Economy: That's a big, big issue that we could spend a lot of time on of what constitutes values.
>> Gary Rieschel: 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 has very little competition for deals.

So I would actually expect that what will come out of China from an investment return perspective over the next five to ten years or the next five years certainly will be very, very good. And that's just because they have constrained the dollars going in. So if you have the dollars, the entrepreneurs didn't die, you know, and the entrepreneur's ecosystem is still very, very robust.

So you have the same amount of capital that was available 20 years ago in a vastly larger and more sophisticated ecosystem. I view that as a good investment bet.
>> Elizabeth Economy: 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.
>> Elizabeth Economy: Okay, last question. On a scale of one to ten, what do you see as the likelihood of a Nixon Mao moment emerging between President Trump and President Xi?
>> Gary Rieschel: Trump is not Nixon, and there's certainly no Kissinger alongside Trump. Mao, Xi Jinping is not Mao, and that may be good.

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

I think the Trump administration has grossly overestimated, overplayed its own hand. I think that, you know, they pay, don't. They don't pay attention to the fact that there are $20 trillion worth of savings in Chinese accounts. I don't think they pay attention to the fact that the Chinese people are incredibly gritty and able to really grind through pain.

So Xi has on his side a group of people that are very, very capable of withstanding pain and suffering. They don't like it, and it's certainly not sustainable forever, but I think it's much more sustainable than 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. And trust comes from predictability, and it comes from the laws. What we're doing now is we're actually taking away the predictability. Trust erodes quickly when there'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 say maybe China is entering a period where it's going to be more predictable in its behavior than the US. That's a problem for the US.
>> Elizabeth Economy: So, Gary, on that note, let me thank you for a discussion that was filled not only with information that I think is extremely interesting about this state of venture capital.

But really I think filled with wise words about how we should be thinking, we in the United States should be thinking about who we are and where we want to go. And about the nature of the competition with China and how ultimately we can in fact emerge as a continued leader in the innovation space and then some.

So if you enjoyed this podcast and want to hear more recent discourse and debate on China, I encourage you to subscribe to China Considered via the Hoover Institution YouTube channel or podcast platform of your choice. In the next episode, I'll be speaking with Michael Dunne, one of the world's foremost experts on China's auto industry will help us understand how China got where it is today and whether the US Auto industry can still be competitive.

Thank you again, Gary.
>> Gary Rieschel: My pleasure.