Wei Zhe, Former CEO of Alibaba and Investor behind ANKER: How I Lost SHEIN and Why I Invested heavily in China's Cross-border E-commerce?
Wei Zhe (Chinese name:卫哲) first came to public attention in November 2006, when he joined Alibaba Group as the president of the B2B business division and CEO. Shortly after that, Alibaba was successfully listed on the Hong Kong stock exchange in 2007. During his tenture from 2006 to 2010, the company's annual revenue soared from ¥1.36 billion ($188.9 million) to ¥5.5 billion ($764.1 million), with profits surged from ¥0.22 billion ($30.56 million) to ¥1.47 billion ($204.2 million).
On February 21, 2011, Alibaba had faced a crisis due to fraudulent transactions conducted on its site and Jack Ma came out saying they gotta stick to their values and be honest. He sent out this memo to everyone at Alibaba, saying they won't tolerate any dishonesty. Wei Zhe took the blame and resigned. Putting Alibaba behind, Wei Zhe moved to private equity business. In April 2011, he founded Vision Knight Capital (hereinafter referred to VK Capital), which raised $800 million from investors that include Alibaba founder Jack Ma.
Wei Zhe's tenure at Alibaba granted him great perception and insights on cross-border e-commerce and more or less led to the successful investment in top Amazon sellers Anker and Ziel Home from China, marking him as one of the most renowned investors in this sector, alongside IDG China's Meng Lian and Sequoia China's Jia Zou.
In January 2024, Wei Zhe was interviewed by Brand Factory at his Shanghai office, where he shared his optimistic view of cross-border e-commerce in China and the rationale behind his investments. He also explained how he lost SHEIN in 2016. But Wei Zhe still believes that cross-border business will bring at least one hundred giants with an annual revenue of over ¥10 billion ($1.4 billion), even though half of businesses will disappear in the coming years.
Why I missed SHEIN
Brand Factory: VK Capital unveiled six transactions in 2023. How many projects did your team evaluate altogether?
Wei Zhe: I received almost 20 project proposals, but I'm unsure of the total number reviewed by the team.
Brands Factory: Were there any projects that demanded more of your time?
Wei Zhe: None seemed to take too long. I tend to focus on projects that promise a profit of ¥300 million ($41.68 million), with a valuation within 10 times, and require a 200 million ($27.78 million) investment from me. Those are the three main criteria: substantial size, significant profit potential, and an attractive valuation.
A larger company often brings bigger challenges. It's easier to go from ¥100 million ($13.89 million) to ¥300 million ($41.68 million), but harder from ¥300 million ($41.68 million) to ¥1 billion ($138.9 million). Once a firm hits ¥300 million ($41.68 million) in profit, the basic issues are usually solved, so I don't need to intervene too much. Also, since my investment can be significant, an appealing valuation is necessary. And of course it’s a waste of time if the valuation is too high.
Brands Factory: Have you seen any new opportunities in 2024?
Wei Zhe: Not really.
Firstly, we've never ventured into any top seller with thousands of acccounts (which is quite normal among Chinese sellers). Not just now, even back in 2017, we believed that such mode is not sustainable despite the high revenue and profit. So when Amazon shut down hundreds of online stores owned by Chinese sellers in 2021, none of our portfolios were affected.
Secondly, where to start, Amazon or your DTC website? As an investor, I've never been tangled up and we advise Chinese entrepreneurs not to be either. It's all about what works best for your product category. Categoriy is the key. If Amazon is the way to go, then stick with it. Take Anker, for instance—standard products, single items, no need for flashy displays. Buying a power bank, headphones, or a data cable, you don't really need a whole product bundle. So they started with Amazon.
But if Amazon isn't your pal, consider starting elsewhere. SHEIN nailed it just because it thrives in a fashion category where Amazon falls short. Also, think about furniture - not exactly Amazon's playground if you need product combos.
Starting elsewhere doesn't mean going all-in with your DTC website. Before jumping into setting up your own website, I'd ask: "If I handed you an online store, could you handle it?"
There are many platforms with opportunities for sellers to try online stores. Even today, eBay still has some categories that sell reasonably well, not outstandingly, but the cost of practicing there is low, right? If you want to sell clothes or aim to have your own DTC website, just have a try on eBay, and you'll understand how to manage a store. Amazon hasn't given you that chance, right?
So, it's not about pleasing investors or pursuing a brand dream with your own e-com site. It's about whether your product category fits well with Amazon or not. That's what we focused on in our decision-making process, and that's why we've never stressed over whether to build your own DTC website or not.
Brand Factory: Can you share why you missed out on SHEIN?
Wei Zhe: We actually had a terms sheet with SHEIN. When Xu Yangtian (founder of SHEIN) first approached us, we agreed to a pre-investment valuation of $130 million and a post-investment valuation of $150 million (Back in 2016, after sealing the deal with SHEIN, Wei Zhe had his wife order 5 clothing pieces from SHEIN. It took almost 29 days for the order to arrive, and what's worse, three items had drastically shrunk. Wei Zhe then gave up the deal).
Brands Factory: When was that?
Wei Zhe: June 2016, quite early. Many people don't get SHEIN right. Today’s SHEIN operates more like a marketplace than DTC site. SHEIN started with their own site. Back then, they had an amazing opportunity when the cost of customer acquisition was low. Meanwhile, purchase frequency of fashion products is high.
Not everyone can turn their own DTC site into a markeplace like today's SHEIN. It is also hard to manage your own DTC site without high purchase-frequency. Baby products, furniture, such product categories are hard to grow sales via your own site because of low purchase-frequency. We don't back any Amazon variety store sellers.
Brands Factory: Any shifts in your investment strategy?
Wei Zhe: In fact, many changes began in 2021 (the year Amazon shut down hundreds of stores run by Chinese), and 2023 is just when we saw the results.
First, we focus more on non-consumer products. Second, we pay more attention to firms with capabilities of "Technology, Manufacturing, and Trade(技工贸）". Let me explain it. Tech says they can handle R&D. Manufacturing demonstrates they have certain production capabilities. Trade suggests they have some sales skills. The ideal portfolios are those who can balace technology, manufacturing, and trade. Initially, the Amazon-oriented sellers put their priority on "trade". But the scenario has changed rapidly.
Before 2023, none of our portfolios had factories. In 2023, all the ones we invested in came with factories, having their own manufacturing facilities and R&D capabilities. We've always emphasized R&D capabilities.
Many founders can easily allocate 2% of their revenue to marketing. But if you ask them to allocate this 2% to R&D, they would get quite hesitated. I convince them that good products will speak for themselves. If you allocate that extra 1 % or 2% to product development instead of marketing, you'll see better results: more traffic and higher profits. However, many of them don't know how to use that millions of budget, and some might not even have a R&D team.
Today, We usually don't back companies without a R&D team. And we stay away from varity store sellers because there are no obstacles preventing entry into your business.
Brands Factory: It seems that your portfolios like Ziel Home and Anker started as variety store sellers. And they did not have any R&D people at that time. How has the strategy evolved?
Wei Zhe: Honestly, they are quite early in our investments. We definitely insisted on that our portfolio is not a pure variety store seller, or at least, a certain percentage of products should be re-designed by your own team. Like Anker, when Anker pitched to us, 10%-20% or even more of their products were redesigned by their R&D team. They had the "Technology", and I'm not a perfectionist in need of a 100% self-developed company; that's silly, right?
So, let me put this again. While we consider variety store sellers, it must possess a certain level of "Technology".
Brands Factory: Did you follow these rules since the first day ?
Wei Zhe: Exactly, all was set from day one. But the concept of "Technology, Manufacturing, and Trade(技工贸）came out in 2022. "Trade" and "technology " have always been our focus. Until 2022, “Manufacturing” was added.
Brands Factory: How to balance the Technology, Manufacturing, and Trade?
Wei Zhe: One aspect may dominate initially, but the key is to remind the company not to overlook the other two, regardless of its starting point. Even for sellers who deeply rooted in trade, R&D should come before manufacturing.
For products with few SKUs and stable demand, having a factory is crucial. However, for industries like clothing with numerous SKUs and fast changes, owning a factory isn't practical. Instead, having influence over manufactuers is essential. Consider SHEIN's efforts in transforming factories. Although it doesn't own them, it exerts control through orders and digitization. This strategic approach has been instrumental in SHEIN's success, which contributes to SHEIN's robust research, development, and design capabilities.
To succeed, "Technology, Manufacturing, Trade" must be balanced. Of course not perfectly balanced at first, but the leaders must be with me knowing which one to improve first.
Brands Factory: Are there more firms meeting your criteria?
Wei Zhe: More and more. Sometimes it's even hard to meet our cross-border eCommerce team in office, all elsewhere for hunting portfolios. Feels like there's a goldmine waiting to be discovered beneath the surface.
We see lots of potential projects coming up. I keep telling them to avoid cross-border eCommerce business relying solely on capital expansion; those enterprises should maintain healthy cash flows.
We also see lots of companies with profits of ¥100 million ($14 million) or more. Some never raised funds, just like our portfolio Ningbo Hicon Tech. With ¥300 millions ($42 million) in profits and their own factories, they’re not short of money at all. Such portfolio may not be necessarily based in Shenzhen or Ningbo; they could be anywhere in China.
Why is "tech, manufacturing, and trade" important now? Because another trend is emerging: pure factories are directly entering cross-border e-commerce. Without factories, how will other sellers compete in the future?
Chinese leading brands going global: a wolf's world with many “deaths”
Brands Factory: Some of China's leading brands are entering global markets. Why you described it as "the arrival of real wolves" for cross-border brands and meanwhile you said they're still in early stages concerning channels, production capacity, and supply chains?
Wei Zhe: They’re wolves, but most are still weak and will surely fail without our help. In our portfolios, there are two product categories: those universally applicable and those not. From an investment perspective, we actually prefer the "not universally applicable." Because universality implies that all of China's supply chains, whether for domestic or international trade, can compete.
Unfortunately, our portfolios like ANKER and Ziel Home chose the universal route. Now, our latest potfolio, a portable ice-maker firm, which are unpopular among Chinese consumers, or AiKai's mobile refrigerators, with low usage rates among Chinese, are examples. The other one 49Tech with pure DIY products aren't widely used by Chinese consumers. If you look at our investments, generally, they all fall into the non-universal category.
Simply ask yourself whether your products are universally applicable or not before entering global market. If yes, you don't have to redefine it. But you have to rethink how you sell it. Whether your sales relies on distribution, franchising, or online stores in China, you have to consider if it still works in overseas market.
For example, the distribution model works so well in Southeast Asia, so Bull (a power strips brand from china) continues with distribution when it expands there. However, going to Europe and America requires a complete product redefinition for their products.
Brands Factory: How to redefine products?
Wei Zhe: It starts with adjusting specifications. Take power strips, for instance. In American homes, they're different from those in China because American houses are larger, requiring longer cords. That's what product redefinition entails.
Moreover, if a pure domestic brand explores overseas market, I often say you can't do this the way a big company's business unit would. Instead, you should adopt the mindset of a startup with VC funding. I'll invest $10 million initially and then provide another $30 million if a certain level is achieved. It's a step-by-step approach; when there's a chance for success, there's a budget.
Brands Factory: Let's talk about E-bike, a quite popular category among Chinese sellers that emerges in overseas markets and is only applicable abroad. How do Chinese leading enterprises compete with local E-Bike startups? What are their strengths and weaknesses?
Wei Zhe: Easy answer. The supply chain might be cheaper, but in terms of product design, it may not necessarily excel. You can see new energy vehicle (NEVs) brands not traditional ones lead the way of Chinese cars going global. Theoretically, traditional car manufacturers should have advantages in NEVs. But as you see, they don't.
The E-Bike category has been quite hot these two years, but we haven't made any deal. Why? You need to read the industrial landscape. The core of the E-Bike lies in the mid-motor, which has been controlled by a few companies, leaving the rest without core competitiveness in technical strength and value chain.
We've reviewed them all, and none fit our needs for "Technology, Manufacturing, Trade" mode, not to mention the revenue, profit, and high valuation.
Brands Factory: It seems you avoid investing in highly innovative products like consumer robots?
Wei Zhe: It's not that we’re against innovation; we just see that new consumer appliance still pop up in recent years with quite high transaction value. Portable ice-makers and refrigerators are good examples which have emerged in the past three years. Of course, there are also many fake trends and imaginary demand for innovative products.
Brands Factory: You said you prefer big and bulky product categories. Companies like Hicon Tech, Blizzfridge, Ziel Home fit this category, right?
Wei Zhe: Not really. Actually, they're quite different. We've never really seen them as part of the home furnishings sector; it's not something we focus on. But as it's such a significant industry, we find ourselves investing in many companies like these.
A simple question: Is your product powered by electricity or not? Once I asked Yang Meng ( founder of Anker) this question — few know that Anker used to sell phone cases — I told him, if it has nothing to do electricity, forget it.
In our view, this is a clear line. For those like Hicon Tech and Blizzfridge with products powered by electricity, our discussions extend to chips, intelligence, and automation; for others, we focus on style and design.
Why? It's not just drawing a line; it greatly shapes the company’s strategy and guides their next steps.
Chinese sellers should de-FBA
Brands Factory:Over the past two years, many Chinese funds have remained quiet, yet you guys has been quite active, especially in 2023. And your cross-border investment team doubled . How do you perceive the industry today?
Wei Zhe: Cross-border eCommerce in China may enjoy a relatively high premiums in the future. And there might be an independent industry block in China's stock market. While cross-border industry shares some similarities with domestic consumer ones, the understanding of companies within it, their risks, opportunities, and valuation systems are unique. The differences are obvious.
To start with, destination markets are different. The companies we target sell their products primarily in Europe and America rather than in China. China has its own business cycle, same to Europe and America. Cross-border eCommerce is about entering other markets, so we position it as an industry particularly resilient to China's market cycles. It means we're not swayed by China's economic ups and downs; we carve our own path, achieving independent performance.
Furthermore, cross-border enterprises mainly receive US dollars and Euros, which serves as a good hedge against the Chinese Yuan. If the Yuan depreciates, theoretically, cross-border companies should rise in value; I haven't done anything, my costs are in Yuan, and my income is in foreign currency. These factors make cross-border eCommerce a high-premium industry. Suppose the same growth condition in the furniture industry, if your profit increases by 30% in China, cross-border firm like Ziel Home may enjoy a premium, with higher PE opportunities.
Brands Factory: Looking ahead to 2024, what's got you excited about the cross-border scene??
Wei Zhe: Now we're primarily focused on building capability to handle big and bulky items, both for industrial and consumer goods. Cross-border eCommerce has entered a challenging phase, where it’s not only about brand building but about what we term as "de-FBA”（FBA: Fulfillment by Amazon; a service offered by Amazon as a means for third-party sellers to automate their order fulfillment and shipping services）.
I often say "de-FBA" should come before "de-Amazon." You can sell on Amazon, but once you need to move out of FBA, the cost has become unbearable and irreversible. Sellers must realize that "de-FBA" for Amazon stores is just like “de-Google” for your eCommerce sites. You can sell on Amazon, but FBA must be phased out. The core message is that previously, large and bulky items couldn’t sell on Amazon, but it is available. There are many opportunities in this category. But you have to deal with the FBA.
Brand Factory: Are you saying there are many opportunities for big and bulky products on Amazon? What kind of stuff looks like in this category?
Wei Zhe: Furniture like bed frames, large wardrobes, refrigerators; bumpers, automotive parts, and even items like beef slicers.
Brands Factory: Sellers dealing with bulky items need to have strong capability of end-to-end chain management. And it is rare, right?
Wei Zhe: It lies in overseas warehouses, last-mile delivery, and certain post-sales services like installation. I'm very keen to identify which Chinese sellers possess this capability now.
Brands Factory: The demands on cross-border professionals have advanced further. Previously, there were considerable opportunities for new sellers from China. Is the whole industry facing restructuring today?
Wei Zhe: Restructuring is inevitable, but I think it's just begun. In the end, we would see at least a hundred companies hit ¥10 billion ($1.4 billion) in sales volume.
We've reviewed ten cross-border eCommerce porfolios. Their combined revenue last year exceeded ¥40 billion ($5.6 billion), growing by 17%, with China's entire cross-border eCommerce market hit ¥1.83 trillion ($0.25 trillion). This signifies two things: first, those companies we invested contributed over 2% to China's cross-border e-commerce GMV; second, we have outpaced the entire industry by 16% to 17%.
Brands Factory: Then how about those middle-sized sellers?
Wei Zhe: Half dead, half alive, 1% success.
We’ve say at least 100 enterprises will make a hit. Of course all these ten cross-border eCommerce companies we invested can hit ¥10 billion ($1.4 billion). That's why we’ve doubled our cross-border eCommerce investments in 2024. We'll heavily back promising projects as long as they're on board.
It’s not up to me. It’s reviewed by our cross-border eCommerce team. They have decided that they will double the investment this year.
Brands Factory: Can you give us a rough estimate?
Wei Zhe: I can't tell you the exact number, but I can say it’ll be doubled in term of investment.