From 2017 to 2018, the most exciting thing in China's economy, sorry, not blockchain, but the comprehensive penetration of the internet economy into the retail industry. On March 3, 2017, exactly one year ago, during the Two Sessions, Zong Qinghou, then NPC deputy and founder of Wahaha, criticized the internet economy in an interview with Xinhua Net, saying that many e-commerce companies promoted sales and bought traffic, disrupting the price system of the real economy. "They buy your product for one yuan, sell it at a loss of eight cents, and after occupying the market, they raise prices, which impacts the real economy." Everyone knows that buying traffic is rarely done by e-commerce companies now, and the claim that e-commerce disrupts the price system is outdated. Sharp-eyed observers can see that this is a roundabout statement by the 70-year-old to maintain his persona as the "eternal opponent of e-commerce." After saving face, the shrewd Zhejiang business tycoon quickly changed his tone, "But the internet is also helpful to the real economy, for example, in management... equipment..." Two or three months earlier, the confrontation was not so gentle. At the CCTV Finance Forum on December 28, 2016, Zong Qinghou angrily attacked Jack Ma's "Five New" theory—new retail, new manufacturing, new finance, new technology, and new energy: "Apart from new technology, the rest is nonsense. Jack Ma doesn't engage in the real economy, what can he manufacture?" "The virtual economy has messed up the real economy," "Too many concepts are hyped, confusing real enterprises." On stage, Zong Qinghou appeared unusually agitated, alongside two other manufacturing tycoons: Gree's Dong Mingzhu and TCL's Li Dongsheng. The forum was broadcast on CCTV's "Dialogue" program, sparking widespread public debate. Three months later, at the Two Sessions, Zong Qinghou's softened attitude signaled a shift. Not only did he shake hands and laugh with Jack Ma, easing the personal relationship between the Zhejiang tycoons, but more importantly, the representative of China's FMCG manufacturing began to rapidly embrace the new retail he had once dismissed. On June 25, 2017, Wahaha joined the unmanned convenience store trend, signing an agreement with DeepBlue Technology for "100,000 units in 3 years, 1 million units in 10 years," with a total value of nearly 10 billion yuan. On November 18, 2017, at Wahaha's 30th anniversary celebration, Wahaha announced a joint marketing cooperation with Ant Financial. Indeed, circumstances are stronger than individuals. In my observation of business cases, Wahaha and Zong Qinghou's former stubbornness and intensity, as well as their rapid reversal in business decisions, left a deep impression on me. Interestingly, Zong Qinghou, along with Wanxiang's Lu Guanqiu, was both a first-generation private entrepreneur and a first-generation Zhejiang business leader. After Lu Guanqiu passed away last year, Zong Qinghou became the leader of the older generation of Zhejiang merchants due to his seniority and prestige, and this collision and reversal occurred between him and the new generation's top figure. I. Real Economy Tycoons Blamed the Wrong Target In my view, the virtual-real economy debate that pervaded 2015, 2016, and into 2017 was misdirected from the start. It was Zong Qinghou and others who misunderstood the concepts, not Jack Ma. Is there a virtual-real economy debate? Of course. But the virtual economy and the real economy do not correspond to the "internet" and manufacturing, respectively. Manufacturing tycoons' misunderstandings of the internet economy can sometimes be laughable. Dong Mingzhu said on CCTV: "Nowadays, young people can open an online store at home and make money, and they don't want to work in the real economy because it's free; going to a company requires clocking in. This generation poses a hidden danger to our country." Sister Dong has a serious misunderstanding of online stores. In academic economics, there has never been a clear definition of the real economy. When we talk about economic growth, what exactly grows? Adam Smith called it wealth, Marx called it value, and modern economics calls it utility. In any case, it can be roughly explained as the ability of a commodity to satisfy people's desires. A young woman opens an online store at home selling tea, clothes, lipstick, or fruit. She is essentially a retailer. She needs to select goods from producers, set up the store, package, and market them. Downstream, she communicates with consumers, handles cashiering, shipping, and after-sales service. When the tea, clothes, lipstick, or fruit reaches my hands, her goods satisfy my desires. In this process, her income contributes to service industry GDP, and this value creation is "economy." If you insist on calling it the real economy, it is the real economy without any impurities. A friend of mine, also a young woman, around 2015 when the sharing economy was just beginning, rented ten one-bedroom apartments in downtown Guangzhou, renovated them in a unified style, gave them unified names, and listed them on Airbnb and domestic short-term rental platforms, renting by day, week, or month. Her average rent per apartment was about 3,000 yuan, and her monthly income was about 12,000 yuan. All cleaning and appliance repairs were outsourced, and she only hired one part-time employee to communicate with customers on the platforms. After costs, her net profit per apartment was nearly 5,000 yuan per month, totaling 50,000 yuan per month for ten apartments. And she did this part-time. Whether it's an online store operator or a shared housing operator, they both put in labor and thought—my short-term rental friend put great effort into decoration, style design, naming each room, and differentiating details—and ultimately, they both received returns. Whether according to Marx's labor theory of value or Adam Smith's division of labor theory, what they do is undoubtedly part of "national wealth growth." Alongside the claim that e-commerce harms the real economy, there is another argument: the internet will impact employment, and artificial intelligence will leave manufacturing workers jobless, making mass unemployment inevitable. On February 26, 2018, the State Council Information Office announced that China's urban registered unemployment rate in 2017 was only 3.9%, the lowest since 2002. Two other figures were also striking: urban new employment reached 13.51 million, and reemployment of urban unemployed reached 5.58 million, both exceeding expectations. Where did the new jobs go? More importantly, where did the unemployed find reemployment? Let me cite three data points. First, logistics and express delivery industry data. According to the State Post Bureau, since 2012, China's express delivery industry revenue and total business volume have grown 2.7 times and 3.6 times respectively, with an average annual growth rate of 53%. There are 20,000 express delivery companies, and the number of employees has grown 13 times in 10 years, exceeding 2 million. According to the China Federation of Logistics & Purchasing, by the end of 2016, the logistics industry employed over 50 million people. Second, ride-hailing employment data. On October 13, 2017, Didi released the "2017 Didi Platform Employment Research Report," showing that the number of new ride-hailing industry employees from overcapacity industries reached 3.931 million, involving coal, steel, cement, chemicals, non-ferrous metals, and other overcapacity industries. Additionally, 1.788 million demobilized military personnel and 2.093 million women joined the ride-hailing driver group. Third, online store data. Alibaba data shows that there are up to 10 million stores on Taobao and Tmall, with about 3 million active stores. Research by Renmin University of China shows that Alibaba's e-commerce platforms alone have driven over 33 million jobs. With the full rollout of new retail, the direct and indirect employment created is difficult to count. Undoubtedly, the internet economy is a new economy. To evaluate whether a new economy is progressive, look at two points: first, whether it promotes productivity, creates value, and satisfies more social welfare; second, whether it drives employment. Whether it's so-called virtual or real is irrelevant. II. The Reconciliation of Zong Qinghou and Jack Ma However, around 2015, China was indeed filled with "real economy anxiety." In my view, the root of this anxiety came from the true virtual economy—the financial industry—not the internet economy. The Chinese government is indeed adept at adjusting macroeconomic policies according to changing circumstances. The stock market crash in mid-2015 was the total outbreak of China's virtual economy problems. At the end of 2015 and in 2016, the "barbarians at the gate" incidents involving insurance capital and Vanke and Gree were annual dramas, showing the enormous risk that the virtual economy could overstep boundaries. While the financial sector's chaos was still under wraps, China's real economy tycoons, on one hand, saw their value highlighted and were bathed in glory, but on the other hand, they pointed their criticism outward. Why didn't they criticize the real chaos of the virtual economy, but instead blamed the internet economy and labeled it as virtual? This is an interesting question, but essentially simple. The simplest answer is that the internet economy had already invaded their territory, becoming their most direct threat, while the risks of the virtual economy were more macro-level. They were collectively drained by the financial industry, but they were not directly targeted prey. Even at the micro level, the virtual economy was constantly offering them "honey and butter." Look at the development of the financial tycoons who were dealt with in the past two years to understand. This subtlety of social and economic evolution is the most interesting part of business history. Conversely, it proves that the internet economy has crossed virtual space and penetrated the real economy comprehensively. This penetration, I believe, begins with the great transformation of the retail industry, and the second step will reach manufacturing. The retail industry's transformation is on the eve of a great revolution, because the revolutionary forces are already at the gates, and the conservative forces' positions have fallen without resistance. This revolution looks more like the Glorious Revolution—really, saying things like "When the times abandon you, they don't even say goodbye" is sentimental. All business transactions are based on voluntary rules, and the most basic economic principle is that transactions are not only mutually agreeable but also beneficial to both parties. From 2017 to 2018, the most exciting thing in China's economy, sorry, not blockchain, but the comprehensive penetration of the internet economy into the retail industry. Alibaba and Tencent launched total acquisitions worth hundreds of billions of yuan, sweeping up almost all traditional offline retail giants. In this new retail war, I don't like vulgar interpretations that focus only on "taking sides" and alliances. In fact, the success or failure of the new retail war is fundamentally unrelated to the competition between Alibaba and Tencent. If the new retail experiment succeeds, both Alibaba and Tencent will benefit; if it fails, neither side wins. This buying spree is certainly not financial investment, not buying and leaving it aside, but rather internet companies truly penetrating and transforming traditional retail. The ambition and strategy of internet companies are clear: using retail as the intermediate link, deeply participating in upstream production and downstream services, starting from the consumer end, controlling upstream, influencing downstream, and establishing a full industry chain of manufacturing, distribution, and sales. Such a macro path is easy to say, but the key is who can do it. Both Alibaba and Tencent understand the theory; the so-called war is just about who executes better. But regardless of how Alibaba and Tencent advance, under such a grand framework, honestly, how can a mere Wahaha resist such a tide? Zong Qinghou created Wahaha's "joint sales system" more than 20 years ago, which bound manufacturers and all distributors together, creating Wahaha's miracle and even entering classic retail marketing textbooks in business schools. But now, Wahaha's retail model has suffered a huge impact. Zong Qinghou and Jack Ma must reconcile. After all, Wahaha's 70 billion yuan of beverages annually still need to enter Alibaba's new retail stores. III. The Edge of New Retail Imagination Is Manufacturing China's economy has entered its best period in years. Although it is still in an L-shaped curve, the 6.9% growth rate is the best in recent years. As mentioned above, the unemployment rate hit a 15-year low. Additionally, there are two other important data points indicating optimism about China's economy. First, manufacturing is recovering. In 2017, the growth rate of fixed asset investment in manufacturing nationwide reached 4.8%, higher than 4.2% in 2016, especially with the PMI index continuing to rise in the last few months of the year. Second, retail is booming. In 2017, China's total retail sales of consumer goods reached 36.6 trillion yuan, a year-on-year increase of 10.2%. Besides e-commerce sales, the Ministry of Commerce reported that physical retail rebounded for the first time in five years, and China's retail industry entered a prosperous period. In a sense, manufacturing represents production and supply, while retail represents consumption and demand. Weak consumption, especially insufficient domestic demand, has always been one of the core problems of China's economy. In the past few years, there have been accusations that online shopping caused the decline of physical retail. But data refutes this conclusion. It is now an industry consensus that new retail, practiced for less than two years, has driven physical retail. In the past five years, China's economy has implemented two major policies at the macro level: supply-side reform and consumption upgrade. One targets supply, the other domestic demand. In fact, supply and demand have never been separate; better supply-side reform can promote manufacturing upgrades and provide better consumer goods, while stimulating domestic demand can provide better purchasing power, complementing the supply side, ultimately driving the overall economic level and public welfare of Chinese society. The power of the internet lies in that it doesn't just focus on one end but connects supply and demand, production and consumption, simultaneously pushing both to deeper alignment and balance. The fundamental reason the internet can do this is that they have mastered a new factor of production: connectivity, data, and computing power. Classic economics textbooks tell us that capital, land, labor, and technology are the basic factors of production. In other words, if a person wants to start a business and produce, they must possess these factors. But what is happening in China now is that there are indeed startups that require almost no factors of production. A college student can create an app and get financing to start a business. He does it alone, without much capital, land, or labor. Why? Because he has mastered the important factor of production of this era: he understands data, algorithms, and internet technology, giving him considerable production factors. However, the internet economy has not overturned economic principles; on the contrary, its enormous energy comes precisely from fully leveraging economic principles. Alibaba has acquired domestic offline retail giants one by one through mergers and acquisitions. This consolidation will strengthen the internal division of labor in new retail, and division of labor can reduce costs, especially when it is based on precise calculations using big data and cloud computing. Now everyone talks about online empowering offline. So-called empowerment means using internet technology to reduce production costs and transaction costs, ultimately benefiting consumers, intermediaries, and producers. I am optimistic about new retail driving consumption upgrades and supply-side reforms. What is more curious now is whether new retail can overflow the boundaries of retail and promote substantive changes in manufacturing. On February 11, Alibaba's investment in Easyhome made me think. In my view, IKEA is a step closer than home furnishing malls like Easyhome, but between craftsmen, manufacturing, and consumers, IKEA is still not satisfactory. If the home furnishing industry, from decoration design, material purchase, to construction management, is cloud-based, does that mean a new consumption experience? Conversely, would this completely transform the furniture manufacturing industry? The edge of new retail imagination is actually in manufacturing. Source: Zhu Xunyao's Virtual Reality (ID: nfzhuxunyao228) -END-