The escalating war between China’s BAT and the offline giants in O2O
This is the fourth article of our 2016 Prediction series. Read other stories in our 2016 Prediction series on Medium: I, II, III.
Though Uber didn’t pioneer the on-demand services business model, it’s the company that brought the concept to spotlight. Similarly, China is not the birthplace of the business model, but has now become the most vibrant market for accessing on-demand services.
According to Sootoo, a Chinese market research agency, China’s “O2O” market — which in most cases is the equivalent of the on-demand market — saw its size increase from RMB 74.82 billion(USD 11.7 billion) in 2011 to an estimated RMB 309 billion (USD 48 billion) this year. Based on Sootoo report estimates, the sector will enter into a plateau in 2016, with the on-demand business maturing in China, after brutal competition over the past couple of years.
Projecting into 2016, the AllChinaTech team believes that on-demand services will still be one of the most important niche markets in the Chinese tech industry. The market will see a consolidation of existing resources following the lead of the Chinese BAT tech giants, during which startups will find it hard to maintain their independence. Traditional enterprises instead, will assume the role of challengers during this time.
Cash-burning will continue to proliferate, but won’t be elevated to the level of what happened in the ride-hailing business during 2014. A more rational business environment will emerge in 2016.
1. Head-on clashes between the BAT
After years of operating online, established tech companies are beginning to expand into the offline market. The on-demand business, or online-to-offline business as it is normally referred to in Chinese, is exactly the opportunity for them to bridge the gulf between the two once separate economic sectors.
Leading Chinese tech companies, Baidu, Alibaba, and Tencent (normally abbreviated to BAT), are choosing to enter the sector through investment. Serving as BAT agents in different categories, rising startups face harsh competition, with billions spent on acquiring users and fostering user habits.
However, as investors became more cautious, following the summer crash of the Chinese stock market, money has since drained from the field and massive mergers took place between Chinese companies at the end of 2015.
The BAT successfully consolidated existing resources through mergers and acquisitions — with most top startups in on-demand services now either backed by the BAT or connected to the BAT via investments or partnerships.
Many of China’s tech mammoths want to reproduce a Google-like experience in China: keeping all traffic inside their product universe and making sure all money is spent within their ecosystem. Considered this way, an on-demand service platform is the entry point for many companies to introduce users to their entire value chain, and also the first brick in their financial empire.
Thus convergence has become a trend for applications in China. Alibaba, for instance, transformed its mobile payment tool Alipay into an all-in-one on-demand service platform with personal finance and social functions last October. Baidu Wallet is hesitating on the social part, but also has a similar interface for on-demand services.
Will WeChat Wallet see a similar upgrade? It depends how far Tencent will extend into the field of on-demand services.
BAT and the companies in each of their galaxies are now tightly competing in most fields. In the food delivery field, Meituan and Ele.me only have a 5% disparity in market share. In the ticket selling sector, Meituan’s Cat Eye Movies leads with 26.73%, while its competitors — mostly backed by the BAT — have market share varying between 7.5% to 15%, according to Chinese market research agency Analysys.
It’s been proven that excessive spending on promotions won’t necessarily increase user loyalty, but an abrupt end to subsidies could result in users turning to competing products during intensive competition. As a result, promotions will likely continue but will no longer be as intense as before.
2. Startups: a choice between independence and survival
To secure a spot in the game, BAT and the other titans will doubtlessly splash out on hundreds of millions to create empires, and we as users, will continue to see welcome promotions persist into the new year.
But for startups in the same sector, the continued subsidies won’t be so endearing if they’re not recipients of investment.
A joke in the Chinese tech scene may best describe startup owners’ current anxiety: venture capitalists used to ask ‘what if the BAT were to copy your business?’, and now they only ask ‘what if the BAT won’t invest in your business?’
The choice is now whether to accept investment from China’s tech giants and give in to their interests, instead of your own, or to risk investment being offered to your competitors, which may pose an immediate threat to your business. For startups, it’s now a choice between independence and survival.
An alliance with the BAT will mean sufficient capital support, but may result in being held back to serve the purposes of the controller. Sometimes, it may mean suspending your business in service of an unpredictable future, like what happened to Koubei five years ago.
Following the Alibaba acquisition of Koubei ten years ago, the platform was soon merged into Taobao and later saw its business development suspended in 2011. Some have suggested this is because Alibaba invested in Meituan that same year. Koubei was revived in 2015, as Meituan developed into a mammoth in the on-demand business, and began to compete with Alibaba’s other native products.
Sometimes things take a turn for the worse. It’s rumoured that the deal between Qunar and Ctrip was delivered by Baidu against the objections of Qunar’s administration. Once a startup decides to exchange control for more capital, they need to be aware of the cost.
As the BAT keeps expanding into businesses offline, more investments will be made in 2016 to form their empire. Startups can seek connections to products with established platforms, to forge possible alliances with tech leaders.
But one should always be cautious about an early surrender for greater investment and resources. While accelerating growth, it may later prove to be a constraint on growing into an influential company in the sector. A generous investment may help a company survive the so-called ‘winter for capital’ in China right now, but if it means trading in the mission and vision of the company, a careful assessment ought to take place before proceeding.
3. Counteroffensive from traditional companies
With their abundant resources and years of industry experience, traditional enterprises can also pose as disruptors of industry.
Supermarket chains are among the first to embrace an upgrade plan to connect their business with the internet. Walmart, the American supermarket chain, is now venturing into the on-demand business in China to deal with the challenge presented from emerging fresh-food e-commerce sites.
Beijing Business Today reported in January that the retail giant is seeking growth in China with the opening up 115 new stores between 2015 to 2017. To achieve this aim and bail itself out of a global decline, Walmart has to face the challenge from China’s vibrant online grocery shopping trend and the best way to deal with this is to catch up with the trend.
Walmart launched its own online-to-offline application last December. Prior to this, it already tested another O2O application Su Gou, which literally means Fast Buy in Chinese, in Shenzhen half a year ago. Both apps enable customers to purchase fresh food and offer door-to-door delivery.
A significant advantage Walmart has over existing online platforms is that they already have a relatively inexpensive solid supply chain and logistics system, that ensures high quality products and a superior delivery service. They will not need to build up such a system from scratch.
But at the same time, offline retailers face the challenge of getting into an unfamiliar online environment, where business dynamics and customer relations can be totally different. Walmart’s quick fix is to get an established team to assist with development. The company fully acquired Chinese online grocery shopping site Yhd last year, which was once a strong competitor to JD.com.
Similar acquisitions and investments may increase in 2016 because Walmart isn’t alone in its predicament. Chinese offline retailing giants have also begun to invest in the field. Da Run Fa, one of China’s top four supermarket chains, acquired fresh food delivery site FieldsChina. State-backed supermarket chain CR Vanguard launched e-commerce platform eVanguard last June but only delivers fresh groceries in the southern Chinese city of Shenzhen.
At the moment, most offline retail door-to-door services are offered only to very few cities. To boost their door-to-door service capacity, these retailing enterprises will more than likely choose to directly invest in existing startups.
Wanda Group, owned by China’s wealthiest businessman Wang Jianlin, is a noteworthy player in the field, having been involved in heavily invested in on-demand services for a while. Companies they’ve invested in include online traveling site LY.com and online business management platform FFan.
FFan is both a CRM system and a mobile payment tool. It is connected to Wanda’s mobile payment tool 99Bill, serving as an entry point for Wanda’s rising online finance business chain. Wang said at Wanda’s end-of-year meeting that FFan is already connected to over 600 shopping malls and covers over 100 million users.
Compared to tech companies, traditional retailing businesses have more established offline business systems, which is one of the biggest obstacles facing newly-established startups in China. With years of experience in the business, these offline retailers also possess an enormous database of consumer information, saving them billions on marketing and user acquisition.
In 2015, the on-demand business saw both the emergence of many ambitious startups and the doom of several others. With more mature competitors entering the field, the sector will have a higher barrier to entry and henceforth, may see more healthy development in the field.
Originally published at AllChinaTech.com.
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Rhea Liu | @yushan_l | January 21, 2016 09:44 am
Rhea Liu is a writer at AllChinaTech. She acquired a Master of Science in Communication Studies from Boston University and a Bachelor of Arts in English Literature and Linguistics from Beijing Foreign Studies University. She also co-founded a podcast featuring Chinese post-90 generation lifestyle and intercultural communication. You can follow her on Twitter @yushan_l.
