In a commencement speech to US Air Force Academy cadets in May 2014, Vice-President Joe Biden forcefully challenged his audience to “name me one innovative project, one innovative change, one innovative product that has come out of China.” This rhetoric is emblematic of how many commonly perceive China; a “copy and paste” society where Chinese companies would take ideas that worked in the West and amend them slightly to fit local tastes. People unfairly see China as a country of rote learners, hardly capable of producing hungry entrepreneurs and innovative businesses.
China is now proving everyone wrong and has emerged as the next largest center of innovation outside of the US. Analogous to FANG (Facebook, Amazon, Netflix and Google), these days investors are touting another acronym, BAT, which stands for Baidu, Alibaba and Tencent. However, Alibaba is not simply the “Amazon of China”, nor is Tencent the “Facebook of China”. In fact, as of writing, Tencent’s market cap of US$488 billion has eclipsed that of Facebook’s at US$451 billion. Tencent has moved beyond simply being a social network company. Its WeChat service has allowed it to embed itself into the everyday life of nearly a billion people in China. From online food delivery, to digital payments and ride sharing, one never has to leave the WeChat ecosystem.
As China’s population grows increasingly affluent, Chinese entrepreneurs are meeting the huge demand for different types of new goods and services with innovative business models. US entrepreneurs pioneered the sharing economy concept with businesses like Uber and Airbnb. China, on the other hand, have expanded upon the sharing economy concept into an internet-enabled asset rental concept whereby companies own products and rent them out to users. A prime example of this is the bicycle rental market.
Bicycle sharing actually started in Amsterdam in the 1960s with the concept of dock-based rentals, where users could pick up and drop off their bikes at stations dotted around cities. In recent times, these bike-sharing programs have also gathered popularity in other global hubs like London and New York. It was actually Beijing-based Ofo which revolutionized bicycle sharing to a dockless bicycle-rental model in 2014.
Exhibit 1: European dock-based model vs. China’s dockless bicycle sharing model
Source: Google images; Press
Unlike cities in the West, where models were focused on city centres for short hops, Asian ride sharing firms such as Ofo, Mobike and oBike took advantage of commuters on the outskirts looking for cheap and accessible transport from homes to the nearest subway station. Given the sprawl of Chinese cities (where most people can live far away from public transport hubs), it made perfect sense. Instead of forking out RMB 20 for a Didi taxi from home to the station, why not rent a bike for RMB 1-2? The affordability and convenience attracted tens of millions of rides a day for Ofo alone.
US-based LimeBike raised a $132m Series B round earlier this year, with investors valuing the company at $225m as of last October. In comparison, just last week Meituan Dianping (which counts Tencent as one of its largest backers) is said to be buying a large stake in Mobike for a reported $2.7 billion valuation. This only serves to intensify the rivalry between Tencent and Alibaba which is itself a backer of Mobike’s biggest rival, Ofo.
It is not just consumers who benefit from the sharing-based economy. Truck Alliance is trying to integrate smartphone technology into China’s traditionally fragmented and inefficient trucking business. Trucking is a trillion-dollar industry in China, where an estimated 80% of the country’s cargo is delivered by road. Yet these trucks stand idle almost half the time in various logistic parks as its drivers trawl around spending hours trying to find their next job.
Exhibit 2 shows a truck parking area—the length of 140 football fields—where thousands of drivers gather daily with their trucks to work out logistics. Typically, a cargo broker holds a hand-written sign and walks around looking for a driver to transport vegetables to Shanghai while another broker tries to get his alcohol to Nanjing. Once the drivers and brokers agree on the shipment, the driver must make his way to factories and depots to load up the cargo. The resulting gnarl of traffic is so notorious that these logistic parks are often called city tumors. [1]
Exhibit 2: Trucks sitting idle in a logistics park in Chengdu
Source: Press search
Enter Truck Alliance. The company is trying to disrupt the process by using smartphone technology to directly match drivers with spare capacity to cargo that needs to be delivered, thus increasing efficiency and lowering transport costs. Truck Alliance derives its revenue from sales of additional services such as toll cards, gasoline, card top-ups and second-hand vehicles through deals brokered on its platform. The company started operating in 2013 and by July 2017 had 4.5 million registered vehicles and 880,000 corporate partners under its network.
In comparison, a similar company in the US called Convoy launched in 2015 and has only managed to build out a network of 10,000 trucking companies, a fraction of that of Truck Alliance’s network. Not one to be left behind in the dust, Uber announced at the end of last year that it too would enter the trucking industry by operating a fleet of self-driving trucks on Uber Freight.
So what drives Chinese companies to innovate quickly? We believe it is a product of a hyper-competitive business environment. The allure of China’s massive market potential attracts numerous players and allows companies to rapidly scale up, but only the very best can survive. There is fierce competition even amongst established e-commerce giants like Alibaba and JD, with market share changing quickly from one quarter to another as evidenced in Exhibit 3.
Exhibit 3: B2C ecommerce market share in China (by GMV)
Source: Analysys.
It is no wonder that many foreign companies entering these markets have found it difficult to compete against the best home-grown companies.
Uber for example, sold off its business in China to Didi in 2016 and recently bowed out of the Southeast Asia market by selling to Grab after a gruelling battle for market share. However, it is still at war with Ola in India. With venture funding available globally and entrepreneurs learning quickly from another, this pattern of Asian and US start-ups competing with each other will be sure to continue. At times the US company may edge out the local competition (Amazon for example looks like it is winning in India against Flipkart and Snapdeal), while at other times, the Asian company will win out. It is important for investors to have exposure to both sets of companies in order to hedge their asset allocation.
Source:
[1] “Three Wharton Dealmakers Bet Their Future on Chinese Trucking”, Bloomberg, May 15, 2017. https://www.bloomberg.com/news/articles/2017-05-14/three-wharton-dealmakers-bet-future-on-china-s-trucking-sector
Other Insights
