Let’s rewind back to the first 20 years of Internet development in China and talk about its business model. What everyone did back then was “Copy to China”. We essentially brought successful business models from Europe and US to China.
- Sohu copied Yahoo
- Taobao copied eBay
- DiDi Chuxing copied Uber
Copy to China (CoC) has been a buzzword throughout the 10 years of Internet development in China. Not only because good examples of Internet innovation has always been in the United States, but also because Chinese stock market always emphasized that businesses should be running a profit before they become listed. And due to various reasons like these, Chinese Internet investors are more willing to invest in “Chinese version” of a company. Companies that have thrived and succeeded in Europe and America are more likely to be just as successful in China. And Chinese entrepreneurs would be more willing to take the initiative and become that “Chinese version of a company “. It’s both easier to explain their business to others and to receive funding.
At the same time, although many CoC companies helped several great domestic Internet companies become what they are today, CoC is not a panacea. In fact, there have been many examples of successful companies in Europe and the United States that do not see the same level of success in China.
The concept of sharing economy has been spreading like wildfire over the past two years. Simply speaking, sharing economy is about encouraging everyone to share with others their idle resources, and creating new social value by raising the usage efficiency of social resources.
While talking about sharing economy in the field of traveling, Uber immediately comes to mind; for lodging, we have Airbnb; and for public transport, there are even shared bicycles, etc. However, what’s interesting is that although DiDi copied Uber every step of the way and was just as successful throughout the process, the lodging finding giant Airbnb just wasn’t seeing the same level of success; No one in China was able to follow up with its business model. This begs the question: Why is Airbnb, although very successful in Europe and the United States, unable to reach the same level of success in China?
The answer is simple and can be summarized with one word: Trust.
In China, people are much more defensive and aware of strangers than those living in developed countries. People in China hold on tight to their purses and wallets while walking through the streets. There is close to no chance of hitching a ride in China because people wouldn’t even bat an eye at you, let alone having strangers live at your place. As far as the Chinese are concerned, anything could happen when a stranger comes into the house, let alone pilfering.
In developed countries, having someone crash on your couch has long been a part of the culture. Couriers are free to leave packages at the front door of the apartment without having to worry about anyone stealing it and inn owners would even leave their room keys at the front desk for guests to check-in on their own! You wouldn’t even need to put in a deposit when leasing a bike. The list goes on and on. On the surface, although mutual trust is what created this large gap in social difference, what lies under is the question of whether or not this system is really as perfect as it seems.
After hundreds of years of market economy development, developed countries has long established a relatively solid social trust system. This system has a strong deterrent, meaning that those who break the trust can be traced and punished. It also illustrates the important fact that: mutual trust can be quantified, which greatly reduces the costs of trust between people in society.
And business activities have always been built on the basis of trust.
Costco is the largest membership-only warehouse club in the United States. It is currently the third largest in the United States and the ninth largest retailer in the world. Since its establishment, the company has been committed to offering high quality brand name goods to members at the lowest price possible.
Costco’s commodity prices are very low. Certain goods are even sold at a price point where it will inevitably yield a deficit. Costco has no intention of making a profit from price differences because it is able to profit from membership fees alone.
Membership fees account for a major share of Costco’s profits. For example, sometimes the company’s membership fee for the whole year is less than 2% of Costco’s total sales, but the profit from these fees account for about 54% of the aggregate profit.
Costco advertises two types of memberships in North America: One that is $55 per year for regular members and a $110 per year for elite members. The difference between the two is that Elite Club members can enjoy a 2% in-cash rebate on consumptions. If a person (or a family) spends more than $200 a month at Costco, then it will be more cost-effective to apply for the elite membership since the cash rebates will eventually make up for the cost of the membership fee. And even though it isn’t difficult to become a member at Costco, the high cost of membership fees give members no other option but to shop at the warehouse to make up for the cost of paying for the membership in the first place.
At the same time, due to low product gross margins, Costco gives an impression of good value for money, which brings about additional business from consumers. And it is because of good value for money, that Costco attained a particularly high renewal rate for memberships, thereby forming a positive business cycle.
Here comes the question: Why has no one in China duplicated this excellent business model of Costco’s?
The answer is yet again very simple:
1. Different consumption habits.
In many western countries, driving dozens of kilometers just to purchase goods is a common occurrence among families. In China, the concept of shopping is just the opposite. Shopping based on close proximity is how the majority of domestic shopping is done. If one were to build a large warehouse store within a high-density city, the costs of property, rent, personnel hiring and other operating costs will be blazingly high. There’s virtually no room for a business model like this to develop in China.
2. The impact of E-commerce
Chinese electronic retailers and online supermarkets have not only developed and become the preferred shopping choice, they are quickly swallowing up any remaining space for offline retailers to operate, which to a certain extent, also piles on to the multiple challenges of running a business model like Costco’s.
3. There are more domestic wholesale markets
Costco serves exclusively to customers who has registered a membership card. But for Chinese consumers, they have long been accustomed to the shopping at wholesale markets which has endured through time. This is especially true for developed coastal cities where a wide variety of wholesale markets are in business. Not only are the services just right for the Chinese, often a phone call will suffice to deliver goods to your doorstep, a much more convenient method of shopping rather than the self-delivery one has to do at warehouse retailers.
Although LinkedIn has in fact garnered the attention of a wide range of Chinese apprentices, not a single website was able to successfully duplicate it after several years of development. Although there has certainly been good attempts such as the websites Tianji (天际网), Dajie (大街网）, Ushi（优士网）, and Wealink （若邻网）.
Why exactly is this?
LinkedIn is a professional social networking website. But its core value lies not in its service of social networking but in its professional and resume database. Simply put, LinkedIn is a headhunting platform. It is designed for large enterprises to find senior level management talents.
However, the business needs of China is much smaller compared to the United States, and can be traced back to two reasons:
First, China’s corporate ecology is dominated by small and medium enterprises. The number of large enterprises really isn’t too high, unlike the United States where after two hundred years of development, all fields have been monopolized by mature business giants. As a result, the business model in the United States for business services is always larger in scale than China. Fields such as financial software, research and development outsourcing, brand marketing and others have all developed much better than within China.
Second, among large enterprises, the United States have more private enterprises while China has more state-owned enterprises (SOEs). The business model of SOEs rely more on internal training rather than outsourcing. For example with human resources, most SOEs begin their training from within schools, or rely on connections. Executives are appointed by the party, and do not need to rely on external supply.
To sum up, with the much larger private sector and higher number of big enterprises in the United States, people are more willing to spend money on finding the right talents. They would be actively getting in touch with better contacts through headhunting, and be matched up with high-level talents with better experience and character. This circle of “gold collar workers” is large enough to support a social networking platform with a market value of over $10 billion.
This sort of demand is undoubtedly much smaller in China at the current stage. One look at China’s traditional headhunting industry would suffice.
Nextdoor is the largest neighborhood app for socializing in the United States. The latest news have indicated that the company has received about $110 million in financing, bringing its net worth to about $ 1.1 billion and clearly ranking it as another unicorn.
At that time, domestic entrepreneurs acted without delay upon hearing about the concept of neighborhood socializing. Ding-dong District (DDD) for one, started off great as a duplicate of Nextdoor. It received a $100 million financing in USD, valuing the company at around 400 million USD.
But upon a closer look, one can see that Nextdoor was established in the United States on top of a more mature community system. It provided mutual assistance mainly to community neighbors; it is a community-based social platform. But China on the other hand has large cities and in fact, lacking in a system of staying familiar with neighbors. It is simply culturally common to stay as strangers with your neighbors.
Therefore, while duplicating Nextdoor, DDD had no choice but to add in new features and services on top of its primary service of socializing such as second-hand cars sharing, carpooling, pet babysitting and close to 58 other similar urban services.
Finally, by offering way too many services altogether, DDD wasn’t able to separate itself from other homecare services, and was ultimately questioned by the capital market. This company that once held large advertising campaigns subway stations of Beijing and Shanghai, met its end by the shattering of its chain of financial supply.
Other startups that have met the same fate as DDD include 001 Community and Life-C. Some were able to find other sources or companies for funding support and continue their operations, but most have embarked on another business altogether.
We must admit that for nearly 20 years of development, the business model of China’s Internet was based primarily on CoC, but we must always keep in mind that Internet startup businesses is as simple as merely “copying” another. Just because a business is successful and high in demand in Europe and the United States, it still might not be able to stand on its own in China because it was nurtured in foreign soil.
What entrepreneurship needs is the right place and the right time. Such is the key to success for any business model in China.
This article by Allen originally appeared in woshipm.com and was translated by Pandaily.
Click here to read the original Chinese article.