Further Monopolies Likely In China's Tech Scene
Welcome back to our China-based readers; we hope Golden Week panned out well.
China’s dynamic startup scene typically takes a consistent path. New ideas usually follow innovations that have been successful overseas, then quickly morph to serve the unique needs of Chinese consumers; capitalising on the distinct ecosystem of embedded mobile payments, devout smartphone usage and lack of privacy concerns.
Any sniff of success and a slew of others will follow. Close to five million Chinese graduate with science, tech, engineering and mathematics degrees every year, many who are optimistic about becoming the next Jack Ma. Most who launch startups will fizzle, but a select few will get funding, followed by more, and more capital, often from one of the big gorillas Alibaba, Tencent or Baidu - bringing the crucial support and channels to scale up to the next level.
Over the past few years China has been awash with investment capital, and with so much money sloshing around these startups can shower consumers with subsidies, discounts and freebies ensuring they get hooked. What follows is a war of attrition, where startups fiercely compete with incentives, burning through cash with unprofitable business models until the less-resourced competitors fall away or are swallowed up by a better-funded player. Mergers and consolidation always follow with the winner usually taking all.
When just one dominant player remains, the sweeteners lessen. We saw this with Meituan and Dianping in 2015, which provided an estimated ¥58 billion ($9 billion) worth of discounts and subsidies for restaurants and movies in 2015 combined. Since announcing a merger late that year, incentives have dropped off. Similarly within three months of the ride hailing apps Didi-Kuaidi-Uber merger, a typical ride that cost ¥8 climbed to ¥13. If we look across almost every online category in China - much like other places - they are dominated by a single player. Ctrip-Qunar control around 80% of the online travel market, Alibaba accounts for a similar amount of ecommerce, likewise Tencent and social media.
We're starting to see similar consolidation for the latest hot sectors in China's tech world. Baidu recently bowed out of the food delivery space selling its Xiaodu subsidy to Ele.me. And on the bike sharing front, where over 30 companies vie for pavement space, riders and critical mass, players are starting to drop off. Market leaders Mobike and Ofo are already said to be in merger talks.
Fortunately China's tech scene isn't just evolving to one big network of monopolies. Some areas are still passionately contested driving innovation and deals for consumers. In what would be a surprise to many, Baidu isn't the leading search tool in China for products. In mature categories such as online travel there are flourishing niche sites that can be better-targeted than the leader. In ecommerce, less price-sensitive and more sophisticated consumers tired of trawling through the expanses of Alibaba's platforms often swap to niche platforms in areas such as luxury, food and cross border, where Alibaba accounts for just a third of sales. Brands would be wise to consider them.
On the subject of cross border commerce, China Skinny's Ann Bierbower will be sharing advice about effectively reaching and selling to Chinese consumers at the Reach Global Customers Through Ecommerce seminar in Los Angeles on October 24. More information here.
Here are this week's news and highlights for China:
Digital China
7 Reasons Alibaba is Becoming More Like 'China's Google' than Baidu: Baidu is often referred to as 'China's Google' yet if you go a little deeper, Alibaba is looking more like Google in many ways.
Shared Bikes in China: a Look at the Market After 1 Year: There are 68 million monthly active users of China's bike share apps, but growth is starting to plateau with users more likely to use just one app. Mobike and Ofo are virtually tied for users, each having about 35 million active users according to Quest Mobile and Penguin Intelligence.
Mobike, Ofo Investors in Talks to Merge China's Biggest Bike-Sharing Startups: Mobike and Ofo investors are in early talks to push China’s two largest bike-sharing startups into a merger, aimed at ending a costly competitive battle and creating a single dominant player in the fast-growing business. The two combined valuation may exceed $4 billion.
A New Narrative of Chinese Corporate Growth: Unlike famous Chinese internet companies like Alibaba Group Holding and Tencent Holdings, the latest crop of startups with skyrocketing valuations are comparatively down-to-earth and generally had humble beginnings, but now boast solid business models.
A Tea and Tiananmen: Inside China's New Censorship Machine: In 2013 China had an army of 2 million content auditors in government departments and private companies in addition to automated tools, with the number believed to have risen sharply as the Government continues to tighten control on online content. The trend has seen VPNs become a popular item for Chinese to bring home from overseas.
Chinese Consumers
How China is Battling Ever More Intensely in World Markets: To separate hype from reality, think of Chinese competition as having three dimensions: illegal, unfair and intense. Each needs a different response. Illegal is declining. Unfair is the hardest to deal with - sharp practice that breaks no global rules where the government restricts access to lucrative sectors, while financing assaults on those same industries abroad. The third, intense but legal competition has shown Chinese firms have proven that they can make good products for less. Consumer prices for televisions, adjusted for quality, fell by more than 90% in the 15 years after China joined the World Trade Organisation (WTO). China’s share of global exports has risen to 14%, the highest any country has reached since America in 1968. Having done so well out of the global commercial ecosystem, China should recognise that it has become one of its custodians. Abuse it—illegally or by overburdening it—and it will break.
Hema Finds Partners to Expand its 'New Retail' Model in China: Alibaba is opening seven new Hema supermarkets and 3 newly renovated stores in Shanghai, Beijing, Hangzhou, Shenzhen and Guiyang - the first in Southern and Southwestern China - to take the total to 20 stores in China. Customers place an average of 4.5 orders per month per user with sales per unit store area about 3-5 times that of a traditional supermarket, as more than half of orders are placed through online channels.
Chinese Tourists
Bumper ‘Golden Week’ as Chinese Make Most of Longer Break: Last week's National Day “Golden Week” saw the number of trips made rise 11.9% on last year to 705 million, spending 13.9% more at ¥583.6 billion ($87.7 billion). The number of outbound tourists was roughly the same as last year at about 6 million, but more travellers were opting to go it alone than join a tour group.
How Brands Should Target Chinese Consumers During Golden Week and Beyond: Savvy UK-based stores have caught onto the importance of social media and experience-led marketing to appeal to visiting Chinese tourists, making the visitors feel special. One example is the Cambridge Satchel Company which embossed satchels with visiting customer's initials.
Food & Beverage
China Postpones Controls on Food Imports After Global Outcry: China has granted a transitional period of two years for sweeping new controls on food imports that require each food shipment to have an inspection certificate from a foreign government.
China’s Yoghurt Sales Poised to Overtake Milk for First Time: Chinese milk sales will grow just 4% in 2017, while yoghurt sales will rise 18% to almost ¥122 billion ($17 billion), surpassing plain milk sales for the first time, Euromonitor projects. While foreign brands should have an advantage, China's three big dairy companies control about 70% of China’s yoghurt market. Yoghurt sells for higher prices than milk because of perceptions that it is more nutritious and can be slimming. [paywall]
Land of the Long-Life Yogurt: Yogurt from the Bulgarian village Momchilovtsi has become a sensation in China, and dairy companies are milking it for all it’s worth. In 2009 China's Bright Dairy took home the bacteria found in the local yogurt which enabled the company to develop drinking yogurt for Chinese consumers. They branded it Momchilovtsi which achieved sales of $910 million last year - the top-selling brand in the booming category.
Kids
Toys 'Я' China: Despite struggling with other markets, foreign toy retailers are experiencing strong growth in China. Toys R Us just opened its 140th store in China following four years of double digit growth in its best performing market globally. Lego's China sales have seen double digit growth despite a 5% reduction globally in the first half of 2017. High-end Dutch toy seller Instore Kids Corners (IKC) has grown 29% in the first eight months of 2017.
Education
China’s Quest for ‘World Class’ Universities Triggers Spending Spree: Beijing has released a long-anticipated list of 42 universities that have been handpicked to be transformed into world-class learning facilities. Regional governments have already earmarked at least ¥55 billion ($8.3 billion) for programmes to help universities boost their standing by upgrading their infrastructure and lab facilities and enlist top talent. China had nearly 2,600 universities at the end of 2016.
Cars
Savvy and Sophisticated: Meet China’s Evolving Car Buyers: By 2022, China's auto market will be larger than the US and Europe combined, with SUVs and the premium segment driving growth according to McKinsey. Around half of buyers no longer think of cars as status symbols, although young people and those who bought expensive cars (>¥400K ($60,000)) are more likely to. Just 12% of recent car buyers want to buy the same brand the next time, versus 19% a year ago - owners of foreign brands are more loyal though. 43% of consumers in Northern China consider domestic cars either more reliable than or on par with foreign brands compared with 33% in other regions.
That’s the Skinny for the week! See previous newsletters here. Contact China Skinny for marketing strategy, research and digital advice and implementation.
