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tv   Bloombergs Studio 1.0  Bloomberg  December 31, 2017 2:00am-2:30am EST

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♪ emily: he is one of the most well-known tech titans of china. kai-fu lee got his start at apple, then moved on to microsoft, and sparked a lawsuit when he left to run google in china. that was before the search engine left the country. facebook and twitter were blocked by the government, and a thriving chinese tech scene sprang up in the void. now he is running a billion-dollar fund to invest in the next tech generation. joining me today on "bloomberg studio 1.0," sinovation ventures ceo kai-fu lee. you came to the u.s. in 1973.
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you were 12 years old. you moved to tennessee. tell me about what must have been culture shock in that moment. kai-fu: i did not speak a word of english, but the people were extremely friendly, that southern hospitality. i immediately made a lot of friends. in class i was totally lost. they were teaching in front and i was reading my chinese books. emily: somehow you caught up because you went to columbia, got your phd at carnegie mellon. you were working on speech recognition, of all things, which now four decades later is the forefront of new technology. kai-fu: also artificial intelligence, machine learning. it was an exciting age when there is so much unknown and so much naive optimism, but it is gratifying to see finally all of that coming to the real world. emily: you joined apple in 1990. how closely did you work with steve jobs? kai-fu: i always say i was there between jobs.
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my tenure at apple, i joined as he left, and after i left, he came back. we did have some intersection. he did call me to see if i would go back to apple, but at that time it just looked too scary. everyone was still predicting apple's doom and i got this job offer from microsoft. so i said, not this time. emily: you went on to work at microsoft in beijing, then google. microsoft wasn't too happy about you going to work for google. in fact, i think they sued you. kai-fu: that's right. it was a big lawsuit. you guys were probably reporting it. everybody was reporting it. i could not escape it. one time i said, i'm just going to go to the airport -- i had a flight and said i was going to get on the plane and read a magazine and take a break, and the magazine was handed to me and there i was on the cover, the lawsuit. but of course, google and i had done nothing wrong, and two months later was allowed to go
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to work at google. emily: microsoft was concerned you were going to take intellectual property and things you had worked on and bring them to google, right? kai-fu: that was the claim, but clearly i was working on something totally different. what was happening was microsoft was afraid of further exodus. so they figured that would be a good way to stop the next 5000 people from going, but that did not really work. emily: google, not unlike many u.s. tech companies, faced its own challenges in china. while you were running google in china, youtube got shut down. kai-fu: we made a decision we would comply by government laws. that allowed us to grow our business from about 9% market share to 24%, and search revenue from nothing to almost a billion, so i thought we were given space to do our business, but ultimately i think the legal restrictions and google's values really didn't allow google to continue to operate.
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emily: youtube getting shut down was the beginning of a series of shutdowns. facebook was blocked. twitter was blocked. kai-fu: none of these companies would have had any chance to succeed in china because american companies were just too far removed from the chinese users' needs. google eventually agreed to create a chinese interface, but way ofuld get in such a the silicon valley-centric way of the world where one platform would serve the world, and that egocentricity would have caused every american company to fail in china. also, if you look at the new companies that rose up in china in a very tough competitive environment, i think wechat is clearly a better product than facebook messenger, taobao is better than ebay, if not amazon,
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and the chinese payment system fully connected, frictionless, micro-payment, peer-to-peer, is clearly better than paypal and credit cards. many people compare it with gladiators in the colosseum, and i am afraid the silicon valley companies are not gladiators. they would get killed in china. emily: you left google in 2009, google with china a few months later. what happened? kai-fu: i had no idea. i was surprised. "new york times" called me one morning and said, what is going on? can we get a quote from you? google just left china. i said, i have no idea. i can't give you a quote. then i read about it in the news. emily: google said they didn't want to respond to the censorship demands of the chinese government. was that the right call? kai-fu: it is hard to say what is right or wrong. i think if -- google is a very value-centric company, so it will do things according to its values, for which we all respect, but on the other hand
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that makes it impossible for the company to do business in china, and i would prefer to see engagement, and engagement would give users more choices, and that would ultimately, i think, lead to the competitiveness and better products, but that requires following the law, and if you choose not to, then i guess you would have to exit. emily: do you think google will ever return to china? kai-fu: i think it is difficult. it is hard to say ever, but the core products cannot return unless they follow the laws and regulations. i do think some secondary products, facebook's oculus is launching in china. i think some of google's new products that are maybe not as core could potentially be launched as an experiment. i think google is a great company, and i would like to see them launch products everywhere. him him --
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emily: facebook has been making overtures, shaking the right hands, and yet we saw facebook's whatsapp recently blocked. instagram and facebook are still blocked. do you see a scenario where facebook can have a substantial presence there? kai-fu: if i were mark, i would definitely launch oculus. i would work hard in getting more chinese companies to see facebook as a platform for ads so that chinese companies can project positive images worldwide. i would consider, if i were either google or facebook, launching the open source ai projects in china. china wants to be a world leader in ai, so there is a case where the interests are aligned, so it is always better to start in an area where the interests are aligned, rather than go into an area where there is conflict in values. ♪ emily: what do you think of the approach the trump administration has taken to the chinese government? ♪
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emily: president xi and the government have been more rather than less strict when it comes to the internet, shutting down vpn's for example. is it a mistake? kai-fu: i really don't know what are the root causes are of this. i would like to access the world's information. i think one thing important to realize from the u.s. side is that, don't assume every chinese person really wants to get on facebook and google. if you do a survey, the great majority don't know these sites exist, and those who do generally think they can do without them. i think people have to understand the chinese substitutes are really, really strong.
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it is much easier for a chinese person to build a virtual friendship circle around wechat than it is for an american person on facebook. it is much easier for a chinese person to use the phone to order services, buy books, and pay other people money, so the chinese internet has become an easier-to-use set of tools than the american internet. emily: what do you think of the approach the trump administration has taken to the chinese government? kai-fu: if i was on the american side, i would be concerned about president trump's visa and immigration policies. if you think about the competitiveness of america, the core competitiveness lies on the brilliance of the universities and researchers and america's ability to draw the top talent to the universities here, and a certain percentage will stay, and i was a case in point. and i think if visas became difficult for the world's top brains to come to these top
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universities, that is going to be a huge long-term negative differentiator for america. emily: is china leapfrogging the u.s. when it comes to artificial intelligence? kai-fu: google is clearly well ahead of the rest of companies, and american companies and universities are ahead of chinese universities and companies, but china has three big advantages that may give it a chance to leapfrog. the first is the size of data, because ai is as much about having a huge amount of data that you can train on and get better than it is about having brilliant minds. the second is the huge army of engineering grad students. engineering and math is the strongest point of chinese universities. in july of 2017, the state council came out with an ai plan, and that is a set of policies that have teeth and are sent to all the provinces and
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cities with lots of funding for ai companies, so with these reasons together i think chinese leapfrog is possible. i would say it is 50-50 right now whether ultimately the u.s. or china will lead the world in ai. emily: how do the strategies of baidu, tencent, and alibaba on ai differ from facebook and google and amazon, when it comes to the strategy itself and the implementation? kai-fu: interestingly, microsoft, facebook, and tencent have chosen to build their research in a powerful but kind of ivory tower kind of way, whereas google, amazon, baidu, and alibaba are trying to take a product-driven approach to ai. i think both are interesting. i also think all seven companies are sucking up the world's top talent, which is not good for entrepreneurship and from an
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antitrust standpoint, and i think chinese companies probably the one part that sets them apart from the u.s. companies is there is not as strong a concern or regard for antitrust consequences, so you see the chinese companies really building empires, whereas i think the american companies, having seen what microsoft went through with antitrust, what google and maybe facebook are going through, are more cautious about saying with their core business. emily: can baidu, tencent, and alibaba become substantial players in markets where facebook and google are dominant? kai-fu: i think the chinese market as a market is probably larger than the rest of the world combined. not in the number of people or the number of dollars, but if you think about the number of people who can be online and immediately be paying for something. this is 730 million people fully connected, can pay for anything
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to anybody, anytime, without commission. we see companies in china acquiring and investing in many companies in silicon valley, but even more so in southeast asia, india, islamic world, so i think the chinese-driven, outside china expansion challenging american top companies is something that is going to happen, probably not on a one-on-one basis, probably not fought on u.s. or china, because the incumbents will win, but the rest of the world, it will be interesting to watch. emily: what do you make of tencent's investment in snap, buying a 12% stake? is this the beginning of bigger u.s. ambitions? kai-fu: i think tencent is very smart about making global investments. i think they teach a lot to the companies they invest in. i have spoken to evan, and he really appreciates all that tencent has taught them based on
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chinese users' behaviors, social, and things like that, but i also think evan has taught tencent through its experiences, so tencent is this very powerful and amazing learning machine, so these investments are teaching what they know, just like tencent and facebook were connected by yuri milner, so there is learning going both ways. so i think tencent, i don't think they have global domination ambitions. i think they are primarily a chinese company, but they want to continue to increase their presence and learn and teach at the same time. emily: what do you think of amazon selling its cloud business, part of its cloud business, in china? kai-fu: i know very few domestic chinese companies using amazon services. amazon services are doing well in china for chinese companies that want to go overseas, so that, i think, will restrict its widespread use. i think alicloud is stronger.
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i think similarly, google sells ads in china, but just for chinese companies to place ads outside of china, so if american companies limit themselves to the outside-going part of china, that would be such a small business, i don't think it is interesting. the only american company doing ok in china is apple, actually. emily: apple returned to growth in china, but still face cheaper smartphone competitors, and yet now they have this $1000 iphone on the market. what is apple's potential in china? are we going to see it plateau? kai-fu: iphone x is ok. it is a step forward, but probably not enough to move the needle. i think overall, apple is gearing up for some exciting products, iphone 11 and beyond, and i think those, i think those may take it a step ahead of the competitive, xiaomi, huawei,
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opo in china, so i am mid-to-long-term bullish because i can see apple building these great leap-forward phone products, but beyond the iphone i think it is tough. i think apple tv, apple car will all have no share in china. apple's r&d spending has soared in recent years. how much is devoted to chips manufactured in china? kai-fu: everybody's hardware is manufactured in china. so i think that is currently china's competitiveness. now some companies are beginning to come back to manufacture in the u.s. in the less human-labor-centric type of manufacturing. i am on the board of foxconn. foxconn has built a number of factories here, so i think america's competitiveness will probably come from the
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automation part of manufacturing. the existing type, i think china has a lead. ♪ emily: who is going to win on self-driving cars in china? ♪
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emily: who is going to win on self-driving cars in china, and why? kai-fu: well, i think our investments will win. we invested in three companies in autonomous vehicles. i think they all have a good shot. each of them has an execution-oriented approach, so i think with autonomous vehicles it is incredibly important to launch, collect data, and use that data to make your product better. obviously, in china, baidu has a big investment. we have a lot of respect for them. didi has a big incentive to make it work because they will lose
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more money if they don't replace the driver. same with uber. so i think on a whole world basis, i am actually a little bit contrarian in believing that shared-economy companies have a good shot, because they are the ones who most desperately need to get autonomous driving to work to fix their profit and loss problems. emily: bike sharing is taking off around the world. you are an investor in mobike. other bike sharing players have simply disappeared. do you see a number of these businesses going under and investor cash disappearing? kai-fu: i think shared bicycle is definitely a winner take all market, so consolidation has happened. there are two players left. either one can kill each other or they will merge. merging is probably more likely. we think mobike has the right product, so we hope it will be merged. emily: have shareholders talked about a merger? are they considering a merger? kai-fu: not that i am aware of,
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but it is obviously but on people's minds. emily: it is something you would like to see? kai-fu: as investors, we want to facilitate the fastest road to prosperity, and we can see a single platform for shared bicycle make a lot more money, because due to competition people are paying cents per hour for shared bicycle rides, but we know shared bicycle is appealing to a fundamental need for people and they are willing to pay, dollar per hour, and that will rapidly push the company from loss to massive profitability, and that is something i think mobike and the other company have to think about. emily: uber pulled out of china. airbnb is trying to charge in. what are the prospects of airbnb succeeding where many other u.s. companies have failed? kai-fu: well, i am not a fan of lightweight american internet companies succeeding in china.
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i am a huge fan of airbnb. i stay in it when i come to the states, but its thin-veneer approach to building products does not work in china. in china, you need to build a very big fence that blocks your competitors, otherwise they will eat your lunch. in china, the chinese company that is building airbnb, they are leasing buildings, buying buildings, refurbishing the whole place systematically and cost-effectively, replenishing the refrigerators at a cost-effective basis, and the chinese people traveling are still looking for a good return on investment, lower costs, so the airbnb approach is great for chinese travelers to go abroad, for foreigners to go to china, but again that is such a small market compared to chinese people consuming products and services within china. emily: so you think airbnb is toast in china? kai-fu: not toast.
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they will make a decent business, just like google and facebook sells some ads in china, just like amazon, but it will be a small percentage of the overall market size. emily: talk to me about sinovation ventures. you've got more than a billion dollars under management. where do you think are the hottest places to invest your money right now? kai-fu: well, artificial intelligence is our big bet. we are investing in ai applied to think tank for use in banks, insurance, customer service. we are interested in ai's use in health and medicine, autonomous vehicles. we invest in robotics, primarily industrial robotics, because i think that is where people can see making money or saving money. we are invested in new types of
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sensors that will bring, way down, the cost of autonomous vehicles and robots, so ai is probably half of our fund, but under ai there are six or seven areas where we invest in. emily: we have seen shares of the big tech companies like tencent continue to rise. where do you see the valuations of chinese technology companies goingm public and private? kai-fu: china's market for internet companies is larger than the rest of the world, so current valuations u.s. to china for roughly close to one-on-one. the u.s. is slightly higher. i think china should be 50% higher than u.s. when it is all said and done, so both valuations will grow. i think chinese will grow more in the next five years because leveraging all this online access, payment capabilities, and the speed of acceleration, i think probably a reasonable equilibrium is maybe 1.5 china, 1.0 u.s., company to company. emily: really? wow. kai-fu: on the other hand i see
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a bubble as well, so i don't say everything will continue to go through the roof. the venture capitalists who do not discriminate will surely put teedo muc too much money and companies that are not ai companies and getting double, triple valuation, and that has to become rationalized overtime. emily: kai-fu lee, ceo of sinovation ventures, thank you for joining us on the show. kai-fu: thank you. ♪
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megan: when satya nadella took over as chief executive officer at microsoft, he was only the third person to lead the company, behind founder bill gates and the charismatic steve ballmer. satya: i grew up in the company that bill and steve built. and i am very proud of it. megan: in his book, "hit refresh: the quest to rediscover microsoft's soul and imagine a better future for everyone," nadella candidly outlines the changes he has made as c.e.o. and what defines the company today. satya: success is not built by actually moving from hit to hit.

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