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What the Luckin Coffee Saga Shows Us About the Secret Information "Fog of War” in China

What Luckin Coffee Shows Us About China’s Secret Information "Fog of War"


Despite the Internet’s penetration into almost every aspect of our lives and businesses, there remain great swathes that are just slightly out of reach and beyond our vision. For Western observers, a combination of language barriers, different content consumption habits and channels, and general cultural differences mean that much of what happens in China is shrouded in a virtual “fog of war”. 

The Luckin Coffee saga sheds some light on the existence of this fog and shows just how the international investment community could be played at their own game of blind return chasing.

This article is part of the Taeltech Insights series, providing information into Chinese consumer behaviours, industry trends, and more. Learn more about Taeltech and our market intel capabilities here


For Your Eyes Only


If you take anything away from this article, let it be this: Chinese nationals consume content in a completely different way to Westerners. This is not to be confused with Chinese people just using different platforms: Baidu instead of Google, Weibo instead of Twitter, WeChat instead of WhatsApp, etc. It’s much, much bigger than this.

A 2018 study conducted by Tencent revealed that for the almost 1billion active users of the platform, over 50% use it as their primary source of news. This news comes primarily in the form of private group chats and article sharing by their friends.

This is ‘private traffic’ and for those standing outside the circle, there is no window to look through. The private traffic and information sharing found in groups can also differ from popular opinion or public knowledge found on social media such as Weibo, meaning that outsiders, investors, and even large brands can often completely misunderstand sentiment around an issue, despite looking at “all the right channels.” 

For those on the ground, Luckin Coffee’s claim of being profitable at a store level in September 2019 seemed unlikely to the point of suspicious - How can a company become profitable during massive cash burn deals such as ‘buy one, get two free’ and mountains of ‘free coffee’ coupons? Then this screenshot began to circulate across private WeChat groups and it all made sense.


Screenshot 2020-06-05 at 16.48.10

A leaked screenshot from Luckin Coffee’s Official Operations Management group chat instructing store owners to “skip order numbers at random, for example 271, 272, 273 can become 271, 273, 274”.



Fool Me Once…


Before we go much further into dissecting how foreign investors were duped by Luckin Coffee, there’s something to note about the Chinese business and social game that can be unpalatable for a Western audience.

Some businesses in China play the game of ‘if you are gullible enough to be fooled, then you deserve to be’. Expressed loosely in Chinese as 咎由自取 (Jiùyóuzìqǔ), this game, although seemingly cruel intentioned, often does not target poor individuals, but instead aims at ‘savvy’ investors and businesses that are well aware they are playing a game (ie. the financial game). The trick being that only the most greedy of investors will avoid the red flags in pursuit of riches - and those people deserve to be swindled.

This is not to say all Chinese businesses operate this way - the vast majority do not. This is just to notice that the rules of the game are different for most Chinese businesses, and even if they do not participate in this gamesmanship, they are well aware of its existence and proceed cautiously. 



Not My Cup of Tea


Moving back to Luckin Coffee - it seems obvious that by looking past the feverish speculation and FOMO-inducing tagline of “Chinese Starbucks”, Luckin’s company and operational history were full of red flags. Detailed clearly in Muddy Water’s damning 89-page report Luckin Coffee: Fraud + Fundamentally Broken Business, it’s obvious now that even regardless of Luckin Coffee’s fraudulent operations, the business model was inherently broken.

So why were these glaring red flags so willingly overlooked? Although some fault does lie in poor control of human emotion during states of FOMO, there must have been something else that allowed some of the world's best financial game players (BlackRock, Singapore’s GIC, etc.) to be hoodwinked. In the mindset of gamesmanship, plain old greed was likely responsible for these losses as financial investors hungry for gains did not exercise proper due diligence and instead chose to gamble on this unicorn startup.

In May 2019, Peking University lecturer and China new-tech expert, Jeffrey Townson wrote about how international investors are ignoring some of the obvious gaps in Luckin’s strategy. #1 being that Chinese consumers don’t drink coffee, they prefer tea and #2, hyper-scaling does not win in retail. These two points alone should have signalled sirens for potential investors, but for some, they did not.



The Chinese Characters Are On the Wall


Despite extensive research into the Luckin Coffee IPO, all analysis by international observers misses one major clue that most Chinese business owners know instinctively.

IPO’s are for making money. Whose money? Investors’ money.

The simple fact that this Chinese tech unicorn sought to willingly give up a portion of control of their company and make their books transparent points to a single purpose - to grab investors’ money. With the philosophy that if you’re gullible enough to be fooled, then you deserve to be, Luckin played the company investment meta-game and under the guise of the information ‘fog of war’, made a killing.

For those outside the loop, Muddy Waters’ short position and Luckin’s subsequent internal investigation came as quite the shock. For those able to see beyond the fog of war, however, the writing was on the wall from the get-go.



In Practice


For foreign investors and businesses looking to understand more about the real growth opportunities and market strategies in China, there can be no substitute for local business intel. This is where Taeltech comes in.

The rules of the game are different, consumers are different and even information flows are radically different. This is what makes China such an enormous and diverse challenge for outsiders, but also what makes it the most rewarding.

Here at Taeltech, we do things very differently to your average consulting company. We have built a representative user base of Chinese consumers through our Marketplace and "Barcode Lookup" consumer-facing products. This has allowed us to accumulate an extensive databank of behavioural patterns that can help brands make data-driven decisions based on what people are doing (infinitely more accurate and useful than self-reporting surveys).

In addition, we offer access to a robust experimental platform where brand owners and marketers can test out hypotheses for themselves with our user base, thus drastically improving their decision making ability. Straightforward interface and low-cost barriers allow generating novel data to inform day-to-day operational decisions, new product launches, multi-million, strategic-level decisions, and more.



About Taeltech


Taeltech is an authentic consumer insight & engagement ecosystem that connects brands with millions of consumers, enabling data-driven marketing and rapid marketing experimentation. Our suite of products also enables brands to build genuine relationships with consumers, boosting brand loyalty, increasing repeat purchasability and creating the conditions to expand into new product areas. Our ecosystem spans China, Japan, Australia, Singapore and Europe, and consists of over 50,000 consumers and products from over 120 brands.



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