Transformation, Planning, Execution, & Manifestation of Technology in Modern Day China

Paul Schulte is the founder and editor of Schulte Research, a company that researches banks, financial technology, bank algorithms, and credit algorithms. He has had a career in equity research which spans 27 years on both the buy and sell sides covering the Asian and emerging markets.

He also has five years of government policy experience in emerging markets. He has been frequently ranked in top-five positions in Euromoney, Asiamoney, and Institutional Investor. In Institutional Investor’s 2010 poll, he received top rankings in All-Asia Banks Team, Asia Equity Strategy Team, and Asia Economics, Team.

Mr. Schulte was most recently at China Construction Bank Intl as Global Head of Financial Strategy and Asia Banks Research and based in Hong Kong. Before that, he was Managing Director and Head of Multi-Strategy and Asia-Pacific Banks Research for Nomura International. Before that, he was Chief Equity Strategist, Asia ex-Japan, for Lehman Brothers.

He served from 2001 to 2006 as Portfolio Manager and Head of Research for GEMS equities at Big Sky Capital, a US$350 million global macro fund (Tiger Cub) of the Wynn Family funds in Los Angeles, California. At the same time, he was also a lecturer at the Hilton School of Business at Loyola Marymount University.

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Transformation, Planning, Execution, & Manifestation Of Technology In Modern Day China With Paul Schulte

Technology started to seep into the agenda and the transformation, in your view, happened in the 2014 and 2015 planning period and then execution.

That's right. The manifestation is now.

We're living in an interesting time. What about large corporations? What's going on? You've got these mega $100 billion-plus companies and it seems like they own the city and they have free rein to take that product and implement it. You gave an example of Tencent. Xinjiang is one of the most amazing places when it comes to how they're experimenting and using tech. Is it fair to say that large companies own their regional territory and are a huge employer and have a monopoly on technology there?

That's what John D. Rockefeller had when he controlled the entire gas supply and oil supply of America, going through the Erie Canal and Pennsylvania down to Maryland and Ohio. He controlled the American oil and gas supply and his company was broken up. We're going through that.

With Alibaba?

Yeah. You hit the nail on the head. All three, Europe, America, and China. I will tell you my private theory of why the financial IPO was canceled. It was exactly what you're talking about. I'm talking as a person. I don't have any affiliation with any of the companies I'm going to mention. I don't own any Alibaba stock. Alibaba had some thinking that they were going to be a railroad company parallel to BSN and a company called Red Date that was building out BSN. China was like, “Not so much. That's not part of the plan. The plan is we're going to run the rail, our rail, BSN. That's a state monopoly.”

Guess what's going to be on it? The currency. We're not going to have the currency running on Tencent. That's too dangerous. In the same way, America is going to have to wake up to the reality that Amazon keeps getting bigger and bigger. Apple gets bigger and bigger. Google is getting bigger and bigger. If they get into smart cities, you can't have private companies running smart cities. Along comes this company, Red Date and BSN. China said, “We told you 180 times, you're not doing this. This is not happening.” Jack Ma didn’t get the memo.

Do you think there’s too much ambition, too much hubris? How often do you hear that you need to know someone to succeed in China? Surely you get to a point where you feel like, “I got the government in my pocket. I can do what I want.” Suddenly you step on the toes and your whole company can be broken up. You're seeding potential market share to competitors who are willing to play ball and do things the way China says they need to be done.

That's exactly what happened. On top of that, when you insult the central bank and tell them that they're not even capable of running a bus station or they don't even know how to sell bus tickets to the bus station, that's not good. If you're the CEO of BNP or HSBC in New York and you tell the founder, “A bunch of idiots,” you're going to be replaced in about a week. That's what's going to happen to you. You don't do that.

Especially the central banks, they get angry when you publicly humiliate them because they have to maintain their credibility because that's the credibility of the country. That's what was going on here. The credibility of the country and the need for a safe rollout of BSN and the eCurrency along a safe route. It’s one of those weird things everyone is struggling with. This is a blockchain, but it's a monopoly. That's not exactly what we talk about when we think about blockchain.

In a digital world, when data is the center of your business, the more diversified you are, the bigger you get.

Central banks are watching China carefully. I'm telling you, I've been to several central bank conferences and they're all going to have to think of an open-closed system here. This is what's going to have to happen. Guess what it's called when you try to be parallel to the central bank. That's called counterfeiting. Counterfeiting has to be a felony or a big problem in the whole wide world. The ECB is trying to figure this out. The Feds are trying to figure this out.

The Middle East, the UAE, is active in this. The UAE is probably going to be a central railroad for these new eCurrencies. The good news is if you're Alibaba, Tencent, or ByteDance, you get to be the train station. The train station is where they have the coffee, the popcorn, the newspapers, the beer, the liquor, the entertainment, and the tickets for everything else in the country. That's the train station. You can do that. You just can't be the railroad.

I'm trying to get my head around the fact that in the West, the belief is you focus on a clear customer problem and you attack that niche. You deliver what we call a single-point solution. You do that well and you carefully expand, but you pretty much stay in your lane. What is the tendency in China for companies to go full-stack so fast?

How is this possible? It goes against the business logic that you're taught when you go to business school in your lecture. I'm curious about the rise of super apps in Chinese companies and Asian companies. I haven't just seen this in China. I've seen this throughout the Asian region. Companies are trying to build everything internally and trying to build this massive stack. Please help me get my head around that.

I've been teaching MBA students for over 21 years. I taught in LA, China, Hong Kong, Singapore, London, New York, and Brazil. I would say that the old model that was a catastrophe was exactly what you're talking about. Diversified conglomerates blew to smithereens because they were all these physical things all over the place. Becoming a universal bank was a catastrophe. It was a disaster.

Citibank tried and it blew Citibank to smithereens because it was trying to be an insurance company, a bank, an investment bank, a broker, a retail lender, and all that jazz. When you have a world of digital technology, you want to be universal. We use this phraseology the confirmation of data sources. The more independent data sources you have, the better off you are as a diversified conglomerate.

Weirdly, a lot of property companies in China are diversified conglomerates. In America, property companies are singular. They're in residential, commercial, and industrial. You seldom see companies that are diversified. The more diversified you are as a digital company, the better your data, the better your information, and the more data-rich your world is.

I'll give you an example we haven't talked about yet. Ping An is data-rich because Ping An has insurance, car insurance, medical insurance, and life insurance. It has a pharmacy, hospital, and clinic. It has the bank and the insurance company. There's no richer diversified digital conglomerate than Ping An.

This goes against everything that was taught in the physical world and that was true. What happens in the physical world with GE and all the companies that blew themselves to smithereens? They became silo. Each individual division was not talking to each other. They weren't cooperating, so there were no synergies. There were no economies of scale. The purpose of diversification collapsed. In a digital world, when data is the center of your business, the more diversified you are, the bigger you get.

Are you saying this is the new model and being focused isn't the way to go and that this model isn't sustainable globally or just in China because of the unique situation there?

The more independent data sources you have, the better off you are as a diversified conglomerate.

I wrote a book about this a couple of years ago called AI & Quantum Computing for Finance & Insurance. Our conclusion in the book was that as long as data is the center of your business, it's a circle of ever-growing circles around a center of data. If the C-suite is the center of your business, you're dead in this world.

If data is the center of your business, you have a living, breathing, and thriving thing where concentric circles reinforce the business and you get new types of data, new types of revenue, and new ways to integrate manufacturing, advertising, buildings, logistics, and so forth. You can end up integrating finance and insurance in brand new ways.

I wrote my first book on FinTech back in 2013. Even then, the banks were like, “Why are you writing this book? What are you talking about? We'll get there. We won't get there now. Nobody's going to figure this out because we all know the plumbing, so don't worry about it. Thanks for coming to the board of directors meeting. Don't let the door hit you in the ass on the way out, Mr. Shulte.”

I feel exactly the same thing with prop-tech. People are coming in and they're rapidly gluing all different kinds of operations of both insurance and finance onto the O2O world. They're figuring out via digitization, 5G, and blockchain how they can meld finance and insurance onto advertising, marketing, merchandising, pedestrian traffic, environmental controls, and utility costs.

Even the civic stuff, bus tokens, metro tokens, the integration of all of those financial elements of civic life, tickets, fines, marriage, birth, death, transportation, and so forth, that's where smart cities come in. If you have those super apps, it's easy to glue this stuff together. I feel that Amazon is waking up to this. Google is waking up to this. You're in a better position to tell me what you see going on there.

Zuck, Bezos, and Cook are spending a lot of time in China and starting to realize, “There's a model here. For once, we’re the ones trying to imitate.”

I agree with you. The conclusion of the book is that a lot of the technology in China will be exported to the rest of the world and the US can copy it. The last chapter of the book is all about the fact that the US is going to have to go and do a spectacular Apollo program again with gigantic amounts of defense that The Pentagon is spending and getting with the program.

This is exactly what they've been condemning and trashing Huawei for four years was its affiliation to the military. There's a great site called DefenseOne.com. It’s a good site with good info. Who's taking the lead in 5G? The military. That's what's going on right now. Who's taking the lead in edge technology? The military. Who's taking the lead in smart cities? The military.

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