Why is Airbnb Expanding into China…Alone?
Airbnb is currently serving 191 countries with its online marketplace and hospitality services. The company recently decided to take on the most coveted location for its expansion and growth efforts: China 🇨🇳📈. Most notably Airbnb has also chosen to expand here without the help or partnership of an existing Chinese company/competitor.
Growth is one of the most essential metrics for any company as it fuels the primary goal: 💰💰💰. eBay has been around for 20+ years and has approx $9B+ in revenue. Comparatively, Airbnb was founded only 10 years ago and has already generated $2.6B in revenue, approximately 1/3 of eBay’s revenue in half the time with a similar 2-sided marketplace business model.
At this stage in the game, strategically it makes most sense for Airbnb to maximize their global footprint and then leverage both time and dedicated resources to deepen the respective market penetration
China is one of the most desired countries for software companies to expand to. With its technically advanced, dense population who often have strong desires for American brands it is an ideal market for US companies to expand to for rapid growth and revenue. The market in China on average has a substantially high average spend and travels very frequently, as a result China is a natural “next step” for Airbnb’s growth plans
Unlike the US & Europe where bed and breakfast culture is very prevalent, in China, hosts don’t want strangers to stay in their primary home. The reason why home sharing has done well in China so far is because a national building boom left a large amount of empty properties. While there is a supply, the relative quality still varies substantially
Why is it so difficult?
Facebook, LinkedIn, Groupon and Uber have all made attempts to expand to the coveted market, but have all failed. The consistent thread amongst all of these tech conglomerates is just that, they are often “too big” before they expand into China. Why is this a problem? The copycat system
China is well known for quite literally copying software that works well in other countries and quickly adapting it to their Chinese consumers. These “copycat” founders naturally have a very intimate understanding of their consumers in China. This is what enables them to rapidly create copy-cat businesses that do extremely well and in-turn gain significant funding long before the original company even tries to enter China
Despite the copying competition, why have so many companies failed?
While something as simple as truly understanding a market might seem like something that can be learned from reading a few articles and talking to a few people, it is much more complex.
While I was at eBay I had the opportunity to launch a new payments product in Germany. While Germany was a significant, existing market for us (our 2nd largest globally), there was still a lot to consider during this launch where I needed to delicately balance
- Addressing the core eBay business needs in Germany,
- while preserving our existing German audience
- and increasing the opportunity for continued growth within the market
In addressing these various needs, I had to lean on the German business team to truly understand the pain points of the consumer to make sure our product would meet their needs. Now looking back, the really interesting part was how it took some time for both myself and the German team to recognize what would be considered “different” from my US perspective since the behavior was so ingrained in their culture it was difficult to recognize it initially as “different”.
For example: We tested eBay with German users on mobile devices. Multiple users indicated that they browse on their phone but then wait to go home to complete the transaction on their desktop computer. I couldn’t understand why. Further discussion with the German eBay team revealed that the German consumer inherently associates a lack of security or trust with mobile devices. They believe that an online payment is more secure if it is made on a desktop computer (not a laptop either) than on a mobile device. Understanding this nuance is not something I would have been able to detect with numbers or even by talking to customers directly. It took several discussions and analyses to identify the ingrained cultural norm and enabled our team to double our efforts in the desktop experience instead of mobile for the German market.
Just like different ethnicities have traditions, established norms have a way of trickling down and permeating through to our everyday. Culture is not just something that our ancestors established. In today’s terms, culture influences our everyday from how we interact with strangers to how we approach buying something online.
Truly understanding a culture and its several nuances is an extremely difficult task and often takes dedicated resources (from that market) and a lot of business experience to gain results
China being such a complex and nuanced culture already positions it as an extremely difficult market for a US country to simply enter
Airbnb is yet to hire a “China Chief” to truly run the expansion, the previous hire stepped down. Their next key hire would have to be someone who has both international experience as well as extensive, local market knowledge. I imagine those with such skills would want to build their own business in China and as a result it must be challenging to convince someone like this to do otherwise
Options, options, and more (cheaper) options
Airbnb already has a few “copycat” competitors in China and of course with competition comes price slashing. When there is so much competition before the US company enters China itself it makes it considerably more difficult to maintain the already established pricing
The consumers of China are power mobile users. As a result, these consumers are well known for not having a high tolerance for first impressions. It is widely understood that the Chinese consumer often downloads 1 to 2+ apps per day and if the user is not satisfied within their first few uses of the app, they will immediately uninstall it and never use it again.
For Airbnb, this means that both its online and physical experiences need to be high quality to ensure successful adoption and market penetration.
Airbnb has indicated that it is vetting its listings in China to ensure top quality, which makes me think they are very aware of this user preference
Does Airbnb have a chance to win over China?
Despite the several obstacles and difficulties Airbnb has and must continue to face, I believe there is hope for them. With the lessons of the previous US companies that have entered the same market, I believe Airbnb can differentiate itself to ensure a winning result
Airbnb’s International Footprint
The key differentiator I see that Airbnb has over its Chinese competitors is its substantial, established global footprint.
When Airbnb first started in China, they had a small team of 30 people focused on attracting mainlanders who were traveling overseas. According to the China National Tourism Administration, in 2017 Chinese tourists took 131 million overseas trips and spent $115B USD abroad. The key observation here was that a significant proportion of these travelers were using Airbnb during these overseas trips
The hypothesis that Airbnb must have arrived at is: if Chinese consumers are using Airbnb for international travel, why wouldn’t they want to use it domestically as well?
But to validate this hypothesis, one would want to understand what is the domestic opportunity here? Well, the China National Tourism Administration indicates that the domestic tourism industry increased by 15.9% from 2016 to reach 4.57 trillion yuan ($710B USD) in 2017 🤯. So while the Chinese international travel is a significant, the domestic industry is MUCH more lucrative in comparison
If we breakdown the traveller customer into 3 subsets. Those who
- Primarily travel internationally
- Travel both internationally and domestically
- Only travel domestically
These numbers indicate that Airbnb has naturally captured the market in subset #1, and now will focus on subset #2. Depending on the numbers (and if competition will allow) I’m sure they will make attempts to also capture subset #3 as well for optimal market penetration and growth
Luxury experiences in China (already launched)
Further evidence of Airbnb’s strategy to zero-in on its niche audience in China is with its recent launch of luxury accommodations 💅🏼😎
Interestingly enough, approximately 80% of Airbnb’s customers in China are millennials, aged 18-to-35-years-old and they seem to be attracting this audience with its strong social media team and its use of Chinese influencers
From a strategy perspective, it makes sense to work on the luxury market first since they are making a conscious effort to be “slow and steady” in China and are vetting every listing to ensure top quality
Experience vs Accommodations
With Airbnb moving more towards full experiences as opposed to just homes, their product offering provides fully immersive experiences as compared to their local competitors. Although it is said that local competitors are quick to catch on to this add-on offering
Additionally, for the Chinese consumer accommodations such as an entire home allow them to travel with extended family, cook their own cuisine and bring pets along as well.
How will Airbnb recognize if they have “won China”?
Uber was known to have burned through $2B USD for its expansion into China especially in its efforts to keep away its local competition. In the end, they couldn’t keep the competition away and the company eventually sold its China operations to its competitor, Didi Chuxing, for a 17.7 percent stake in the company.
Airbnb has been very vocal about its initiatives in China. They started their expansion in 2015 and have indicated that by 2020 it will be their most significant market. They are just about half way through their timeline and I would hope that because they haven’t abandoned ship yet, their numbers must be promising
There was a rumor that Airbnb was set to merge with its main competitor: Tujia. But both parties deny the potential partnership, and Airbnb’s gusto to forge ahead alone must indicate that they see some positive impact and/or numbers
Key metrics I believe the team must be monitoring
- Is revenue > cost?
- Average monthly host income over time? Is it increasing/decreasing? At what rate?
- Average number of host requests? How many are up to Airbnb’s quality standards?
- Repeat domestic guests? Average number of stays? Is it increasing/decreasing?
Airbnb is a smart company, while it would be nice to be able to predict with 100% certainty that they will win over China, in all honesty these things take time. I think it’s quite brave of them to have given themselves a date (2020) as to when this market will be its leader. This bold statement alone gives them makes them accountable, provides a clear timeline and an additional means to measure their performance.
As much as a business should know when and where to grow, it should also know when to get ou
While I do think it will be a bumpy road for Airbnb to truly capture the market in China, I do think it has the ability to go it alone and win.
Elements such as cultural tolerances are delicate elements that I believe it can win over with strategic hires and maybe even some key acquisitions. I believe merging with a competitor may not lead to a fruitful outcome at this time as Airbnb is still a relatively small player and it would make more sense for a competitor to simply acquire them just to squash them. If they stay true to playing into their strong brand value, hone in on their loyal, millennial audience and play into their unique domestic and international travel angle I believe they can win in China.
Maybe they will just focus on a niche demographic (ie: luxury travel experiences), but for what it’s worth winning even just that sliver of the market itself would be “winning China” in my book