Zhan Hongzhi talks about the subsidy war: Paying attention to the capital market too late and missing growth opportunities

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This article The author Mindy Huang (Huang Yixuan), thank you for authorizing the “Content Hacker” website to reprint, and hereby express my gratitude.

Today (June 7), I listened to the speech of PChome Chairman Zhan Hongzhi. The theme was the Shopee battle. I felt the need to record this speech immediately and write down my own thoughts.

This is the case every time Zhan Hongzhi gives a speech. When he explains a story or an idea he wants to promote, he will review it through a large framework instead of going straight to the point.

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At first, you may wonder why he said this? But when you listen to the whole scene, you will find that the previous layout is meaningful. Because he lets you know that through the previous stories, today’s decision-making was created. This speech once again demonstrated such magic.

Talking from the experience of youth

Today’s theme is the Battle of Shopee, and the main title of the slide is “Three Billions Are Pursuing…”.

Why did publishing houses publish five new books at once?

He used “spend money” to break the topic at the beginning, but he was talking about his experience when he was young. Before joining Yuanliu, Zhan Hongzhi was a wanderer, specializing in newspaper advertising in the publishing industry. To apply the current profession, it is an agent who helps large companies buy Google or Facebook ads. Of course, there was no Internet in his day, and newspapers were one of the few media where ads could be placed. What he does is collect a lot of money from publishers and find ways to optimize advertising effectiveness.

I heard a very interesting story here. In that era, publishing houses published five new books at a time. Why? Because at that time newspapers only had three sheets of paper, advertising space was expensive, so publishers could only buy small spaces, about as big as a banner.

After many attempts, Zhan Hongzhi found that in such a small space, four books of introduction seemed wasteful, but six books was too crowded, so he finally reached the optimal solution of five books. This is the experience Zhan Hongzhi learned after spending millions of dollars in advertising from various publishing houses. The customs and customs at the time were that of an honest and honest person who said, “I have spent so many resources to learn something, so I should teach it to everyone so that everyone can save money together.” So gradually every publishing house used his advertising techniques.

How Yuanliu obtained the authorization for Jin Yong’s martial arts novels

Then, Zhan Hongzhi shared another amazing story with us, which I think Jin Yong fans will be in an uproar. Everyone should know that Yuanliu is publishing Jin Yong’s novels, but how did Yuanliu obtain Jin Yong’s authorization?

At that time, Jin Yong’s authorization was in the hands of Yuanjing, but the publishers knew that Yuanjing had financial difficulties. One day Zhan Hongzhi and his boss met Jin Yong in a restaurant. After exchanging pleasantries, Jin Yong suddenly turned around and asked him, “Do you want to publish my book?” Zhan Hongzhi believed that Jin Yong was an indicator of Chinese culture. If Jin Yong’s book could be published, it would be an opportunity not to be missed. So he immediately wrote a proposal and went to Hong Kong to meet with Jin Yong twice. Both times he only received a “very good, very good” response, but no substantive reply.

After being rejected for the second time, he returned to the hotel and decided he couldn’t go on like this. He made a very risky move and changed the proposal to “give him one million Hong Kong dollars up front when signing the contract.” But if you just use this proposal to knock on doors without showing the author actual results, you will not be able to win people’s trust.

At this time, he thought to himself, I must take this million Hong Kong dollars directly to Jin Yong. But where does he have the money? Who around him has such money? And it can still be lent to him immediately. He made one last call and asked someone who had such ability but whom he was not very familiar with, Zhang Sijia.

At the end of the story, Sylvia Chang immediately loaned him one million Hong Kong dollars, and he successfully obtained Jin Yong’s authorization. Yuanliu can now publish Jin Yong’s novels. But this story is just an introduction, to lead to the key points he will say later.

When Yuanliu finally obtained Jin Yong’s publishing rights, he discovered that Yuanjing was in debt and allowed the printing house to print tens of thousands of Jin Yong’s novels, which flowed into the market at a very low price and casually. This gave Zhan Hongzhi a headache. He had promised to pay the author so much royalties, so how could he compete with others at a low price?

When he was struggling to figure out the solution, he invited seniors in the publishing industry to ask for their advice. The words of one of his seniors woke him up: “Why do you want to compare with those who pirated copies? If it were me, I would sell them more expensively and emphasize that I am genuine.” These words later gave birth to the term “Collection of the Best” coined by Zhan Hongzhi. He built a set of Jin Yong worth 12,000 yuan, and sold 2,000 sets in the first year, which was enough to pay the author’s publishing fees.

What do these two stories have to do with the Battle of Shopee? Through such stories, Zhan Hongzhi lets us understand how Taiwan did business in the early days and exchanged what was needed. In that era when everyone was still very poor, entrepreneurs would help each other. The second truth he wants to tell us is that the market has niches. You don’t need to beat your opponents, but create something new and make a difference. The correlation between this and Shopee Battle is only gradually revealed in the second half.

Why e-commerce giant Amazon adopts subsidy policy

Then, Zhan Hongzhi stopped talking about ancient times and brought the focus back to “subsidies.” But he did not directly talk about [Shopee’s subsidies] (https://www.managertoday.com.tw/articles/view/56213), but started from the relatively large subsidy battles in the past.

The first example he gave was Amazon. He remembers clearly that at that time, Amazon’s international shipping fee for sending the first book overseas was US$4.95, but after the second book, it dropped to US$1.95. At the time, he didn’t understand why Amazon was doing this. Isn’t it losing money? Because he knew that some mail-order operators would deliberately set the unit price of goods low, close to zero gross profit, and then use postage to make money. And Amazon obviously won’t make money by doing this, so why?

Later, he got the answer from an interview, and this answer became an important concept for his future development of e-commerce. At that time, Amazon in the United States had defeated all its online rivals and caused all the original physical bookstore operators to close their doors. A reporter asked Bezos (Jeff Bezos) why he continues to subsidize shipping costs when he is already number one?

Bezos said that his opponent is not other e-commerce or physical bookstores, but people’s behavior. (At that time) people were still a little afraid of online shopping. As long as people had this fear, no matter how good my service was, no matter how fast the delivery was, and no matter how low the price, people would not buy things on my website. Therefore, I must take concrete actions to reduce this psychological barrier, and freight subsidy is the most direct way.

This concept greatly influenced Zhan Hongzhi’s thinking. From then on, his e-commerce strategy was not about how to be cheaper than others, but how to change human consumption behavior?

In 2010, Zhan Hongzhi talked about the rise of PChome at Tsinghua University

Hearing this, I immediately remembered the content of Mr. Zhan Hongzhi’s speech that I first heard at Tsinghua University in 2010.

At that time, he put 2,000 books in bookstores across Taiwan for sale, and finally looked at the sales data. Data shows that 1,000 copies were sold in the Beibeiji area, and the remaining 1,000 copies were sold to “other places in Taiwan.” Then, he sold the same 2,000 books on the Internet. Data showed that 1,000 books were bought by netizens from Beibuji, and the remaining 1,000 books were still bought by netizens from “other places in Taiwan.” This shows that people’s use of e-commerce is not just for convenience, but a life style, which is the birth of a new lifestyle.

One New Year’s Eve, he asked his colleagues in the company to still deliver goods to their homes 24 hours a day. Employees could not go home to celebrate the New Year, so of course he had to be in charge of the company. He ran to the warehouse and saw a special scene that he didn’t expect. He saw 46-inch LCD TVs being sold in container after container, with dozens or hundreds of units being sold.

He thought it might be because it was rare for everyone to go home for the New Year, and he discovered that his mother’s TV at home was very old and hurt her eyes. Fortunately, it was delivered to the house 24 hours a day. If he placed an order on New Year’s Eve, he could help his mother move and install the TV herself the next day. Only then did Mr. Zhan realize that e-commerce and 24-hour door-to-door delivery services were no longer purely commercial activities, but rather created a new life experience. Maybe in the near future, you can order dinner online, pick it up at a convenience store after work, and order whatever you want.

From the above speech, we can verify what Zhan Hongzhi said today, what you want to challenge is consumption behavior. Only by triggering behavioral changes across an entire generation will it be possible to create a larger market.

In the historical battle of subsidies, Zhan Hongzhi also mentioned the story of JD.com and Didi. Everyone is familiar with these two stories, so I won’t repeat them. But what matters is what these stories teach us.

Zhan Hongzhi condensed several conclusions here, which in my opinion can be regarded as the “mystery of subsidies.” First of all, you have to look at whether the behavior created by your subsidies is sustainable?

He gave the example of starting a magazine in the early days. To start a magazine at that time, you probably had to sell 30,000 copies a month to make a profit. Otherwise, you would have to burn millions every month. Therefore, when he founded the “Computer Family” magazine, he first launched a loss price of 49 yuan, which was actually a disguised subsidy. He wants to attract people to see the magazine first, and then find ways to make people continue to buy the magazine through good content in the magazine. When consumers actually continue to purchase the magazine, or even subscribe for a long time, his initial subsidy will become meaningful. Or like Didi Chuxing, it was more exaggerated at the beginning and did [two-way subsidies] (http ://finance.sina.com.cn/chanjing/gsnews/2016-06-16/doc-ifxtfrrc3703869.shtml), he allows drivers to make more money by carrying passengers, and passengers can get tax exemptions when taking the bus. In the end, all passengers had to use Didi, otherwise the bus would not be stopped on the roadside. And all drivers can only use Didi, otherwise they will not be able to grab customers. Didi’s [subsidy] (http://finance.sina.com/bg/economy/sinacn/20160801/04091482177.html), which seemed crazy and bottomless at first, now seems to be a conscious act. It has changed people’s behavior and turned the app’s ride-hailing into a sustainable momentum.

Deliberate subsidies can create behavioral changes that can lead to massive growth.

What Zhan Hongzhi learned from the Battle of Shopee

After introducing the history and mysteries of subsidies, the speech finally came to today’s topic—the Battle of Shopee.

In fact, PChome has noticed Shopee since the end of 2016. At first, PChome suffered an unprecedented cyber attack on May 20, but at that time, it was preparing to go public in Hong Kong, so Zhan Hongzhi and the company executives did not dare to act rashly. Later, there were still wavelet attacks one after another, but the strange thing is that these attacks did not extort anything. Instead, it seemed that there was someone in the dark trying to test the capabilities of PChome?

At the end of the year, people around Zhan Hongzhi began to tell him, “Oh, my kids are all using Shopee.” Zhan Hongzhi certainly knew what this meant. Just like when parents invade Facebook, it is time for the children to leave Facebook.

Therefore, he immediately checked all the data, including open air, shopping streets and PChome 24h shopping. But what’s puzzling is, “No data has been lost?” Yes, it is true that some growth momentum has been lost, but in fact, PChome has not been robbed of anything!

Even so, this matter was still a thorn in Zhan Hongzhi’s back. He could not deal with this hot potato at the same time as he was preparing for an open-air listing. He knew that he had to concentrate on facing it. So he decided to postpone the listing. Anyway, the open-air listing was not because of the urgent need for money, but because he wanted to become an example and hope for Taiwanese entrepreneurs. There was no harm in doing it later.

The postponement of the listing is of course big news, so some reporters made a big [article] using the phrase “Xiaomi Xiaopi overwhelms the big whale, PChome is suspended from the market” (https://udn.com/news/story/7254/2536299?from=udn-catelistnews_ch2). Shopee is also very powerful. After the report came out, they immediately followed the snake and followed the stick, and all operations revolved around this theme.

Suddenly, everyone started complaining about PChome’s old interface and poor process. Shopee was smooth and subsidized, making it look like the god of the new era. Zhan Hongzhi said that you have absolutely no way to defend against this situation, because the enemy is not attracting your original customer base (it is the children of your customer base XD), so there is no defense at all.

Only attack is the best defense.

But he can’t use Open-Air to attack it, because Open-air’s turnover is dozens of times that of Shopee. Shopee spends 100 million in subsidies, while Open-air has to spend 1 billion. It is unwise for the leader to turn around and fight the pursuer. What you should do is to take a new character that is smaller than him, not afraid of losing or fighting, and fight him head-on. So Zhan Hongzhi sent the shopping street to compete with Shopee.

jump! Doesn’t this bring us back to the inspiration from the Jin Yong incident I just talked about? This is what I said at the beginning, the magic of Zhan Hongzhi’s speech.

Subsidies are more practical and effective than marketing

Everyone knows the story behind it. Shopee and Shopping Street started a subsidy war for free shipping, which also started the three billion spending experience. Zhan Hongzhi said that he spent less than 3 million in the first month, which was very miserable. It means that if you ask for subsidies, no one will bother to pay attention to you. However, with the help of the media, everyone has discovered that the two sides are fighting a subsidy war. At this time, consumers have no loyalty at all. Whenever they want to buy something, they will compete with each other to see which side has more subsidies. By December 2017, the subsidy for shopping streets reached 900 million, which sounds terrible, but if you think about it, it means that this subsidy war has brought tens of billions of revenue to the shopping streets, and this 900 million subsidy was generated.

Therefore, in a certain respect, subsidies are more practical than marketing. Marketing may only impress some people, and only half of those people may actually consume. But subsidies only occur when there is consumption, and they bring solid profits.

Okay, but in fact Zhan Hongzhi’s point is not who wins and who loses in this war (it doesn’t seem to be over yet?). He wants to bring you two more important thoughts today, which are actually the importance of quickly obtaining actions and raising funds.

Why is Shopee fighting a subsidy war with PChome today? Because Shopee wants to quickly capture the behavior of Taiwanese consumers “using the app to shop”. Why should we achieve such behavior? Because Shopee’s target market is the so-called “Greater Southeast Asia”, which is Southeast Asia plus Taiwan. Compared with other Southeast Asian countries, Taiwan’s e-commerce market is mature and consumers are already accepting of online shopping, so it is relatively easy for Shopee to promote app shopping in Taiwan.

With Taiwan’s successful experience, he can assure investors that he can achieve the same success in other Southeast Asian countries. And such success will ultimately bring about a very, very huge market share. When you have “behavior change of 600 million people” as your ultimate goal, the billions of subsidies you invest in Taiwan will appear to have a high CP value, and this is the “conscious subsidy” he just said.

Okay, even if you see the future, you know that subsidies are a meaningful investment, but where do you get the money to burn? Zhan Hongzhi brought out another important point, which is that “new ventures that are rapidly achieving behavioral changes will never stop raising funds.” Like Didi, Airbnb, and even Alibaba, after one round of financing, they immediately find buyers for the next round. It seems that fundraising is the company’s main business. Shopee is such a company. They continue to raise funds with the great dream of expanding Southeast Asia. Raising funds is not only because of lack of money, but also because they want to take all the money in the market into their own pockets, so that competitors have no money. Only by continuously raising funds can we afford the subsidy war, successfully achieve behavioral changes quickly, and eventually capture the entire market.

After the meeting, someone asked Zhan Hongzhi what decision he regretted most? Zhan Hongzhi said that his biggest regret was paying attention to the capital market too late. In the years after the dot-com bubble, as long as the company made money, it would pay dividends to shareholders. He wanted shareholders to know that Internet companies would also make money, and he wanted to build shareholder confidence. But now that he thinks about it, this is not what a growing company should do. He should try to keep all the money in the company and let the company continue to grow.

The same goes for raising funds. If he paid attention to the capital market earlier, he could build a dream as big as Shopee, attract investors, and absorb all the money in the market before his competitors grow up, preventing others from taking advantage of it. Thinking about the capital line is Zhan Hongzhi’s biggest gain after the subsidy war. Although he learned it through a painful lesson, it is never too late.

Core thinking of business competition

Finally, I would like to leave a special paragraph to explain what I think is the most important concept tonight, which is “imagine how your opponent thinks.”

Put yourself in the other person’s shoes and speak their language

Why can Zhan Hongzhi see Shopee’s purpose and strategy? Because he tried very hard to put himself into Shopee’s perspective and tried to guess what Shopee was thinking. How to do it specifically? The most direct way is to “speak the other person’s language.”

New startups in every era have a new set of operating indicators, and these indicators are the “language of the company.” For example, Shopee does not talk about monthly turnover, but “annualized turnover”, which means multiplying the month with the highest turnover by 12 in a year. This is not PChome’s method at all, nor is it the method of other existing e-commerce companies. It is Shopee’s own language.

Therefore, Zhan Hongzhi changed all the nouns within the company to those used by Shopee. At first, you may not know why you are talking about these annualized turnovers, but as you talk about it, you will probably start to understand what the other party’s logic is? What do you think?

After the meeting, I ran to ask Mr. Zhan Hongzhi how to cultivate the ability to “understand the opponent.” Mr. Zhan Hongzhi said that there is no shortcut, it is just the accumulation of bits and pieces. You have to listen to every word he says, scrutinize his meaning, and see the meaning behind every decision he makes. And using his language is the first step to understanding your opponent. I think this is my biggest gain from this speech.

Time flies. The last time I recorded Zhan Hongzhi’s speech was 8 years ago. Looking back at the record now, I still feel enlightened. Today I was enlightened again by Zhan Hongzhi’s big picture and humor. I deeply feel that living in an era like this and having such wise seniors speak to me is a great blessing.

I hope that I will have the opportunity to record Mr. Zhan Hongzhi’s speech again in the future!

Experience from the speech 8 years ago: https://www.ptt.cc/bbs/toberich/M.1292517472.A.0C2.html

★ Photo Credit: Keagan Henman

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