Triggered by the hype of sharing platforms like Didi Chuxing (滴滴出行) or Mobike (摩拜单车), Daxue Consulting decided to take a closer look into the collaborative economy in China. However, the term raises a lot of confusion as the public almost always refers to it as ‘sharing economy’ only. We constituted a framework of collaborative economy, illustrating that sharing economy is only one part out of two – with the second part being so-called ‘on-demand rentals’. The latter, however, raise questions in terms of their profitability. Finally, we show how the affinity for mobile payment in China and the governmental support path the way for China becoming global leader in the collaborative economy anyway.
Exploding collaborative economy in China expected to account for 10% of China’s GDP in 2020
Residents of Chinese largest cities will have already noticed that they don’t have to worry anymore about things like carrying a basketball to the court or what they will do if they couldn’t catch the public taxi. Thanks to the convenience of mobile payment, nowadays available assets nearby such as the next Mobike get easily accessible, which also leads to more and more people in China spending more time on their smartphones. In 2016, approximately 700 million mobile internet users (12% more than 2015) spent 30% more time on the mobile internet than in 2015. The “Internet of apps” phenomenon is particularly true in China. Among smartphone owners, Chinese netizens spend most of their time on their mobile phone using three apps: Tencent’s WeChat (微信), Tencent’s QQ, and Alibaba’s Alipay (支付宝), followed by Tencent video (腾讯视频) and Youku video (优酷), according to the “Chinese Apps Active Users Ranking List”, published in April 2017 by iiMedia Research (艾媒咨询). Also, there has been a shift in the e-commerce. While in 2014, the majority of e-commerce spending was done via desktop, almost three-forth was generated on mobile devices, backing the rise of mobile payment in China. Third-party payment apps like Alipay and Tenpay (财付通) (through the social media platform WeChat) became a significant part of everyday life especially through the QR code technology, which also allowed an easy implementation for store owners. Start-ups know how to take advantage of that – dozens of new apps Start-ups know how to take advantage of that – dozens of new apps like Mobike, which are classified as part of the collaborative economy, are smartphone-based, or more precisely, mobile payment-based. By scanning a QR code, almost every asset in demand can be accessed and the fee for the rent-out will be automatically withdrawn from the customer’s bank account.
Recent figures show that this type of economy is more than thriving. According to the National Information Center, the collaborative economy in China was worth $500 billion in 2016 and is expected to grow 40% annually until 2020, reaching a value of $1,921 trillion:
Reproduced by Daxue Consulting with data from National Information Center
Besides the already established business models of ride-sharing like Didi Chuxing or apartment-sharing like Airbnb (爱彼迎) and Tujia (途家), nowadays more and more start-ups come up with many new business ideas in China to establish new kinds of sharing and renting. Among these new business models are Molisan’s umbrella (魔力伞 ) rent-out, Xiaodian’s portable battery stations (小电科技) in shopping malls or Zhulegeqiu’s basketball (猪了个球) rent-out, for instance.
Example of one of Zhulegeqiu’s basketball box’s in front of a basketball court at Jiaxing University (嘉兴学院); Photo source: kknews
However, so far the best established new business model in China is the one of bike-sharing like of Mobike and Ofo (共享单车). This trend of basically sharing and renting out every possible asset or service does not only lead to the increasing value of the collaborative economy. It will also have a significant impact on China’s whole economic output. If one takes a closer look at the data, one can see how much the ratio on the GDP will amount over the next ten years. A first impressive mark will be to reach 10% of the GDP in 2020. According to the same report of the Chinese government, this will be only an intermediate step, though, reaching a ratio of 20% in 2025:
Reproduced by Daxue Consulting with data from OECD
While the GDP growth is expected to be steady at around 6 to 6,5 percent, the much faster growing collaborative economy attains a larger and larger share of China’s GDP, starting by only 3,52 percent in the past year.
While these figures show that the increasing importance of the collaborative economy in China is undeniable, at Daxue Consulting, we found a severe problem during our research. Namely that the term of collaborative economy is often mistaken or put on a level with sharing economy in the common tongue.
Sharing economy does not equal collaborative economy – it is only part of it
Since everyone is talking about the “booming sharing economy”, it got kind of blurry what is exactly what and we found that the actual term which describes the whole phenomenon, collaborative economy, is getting neglected. ‘Collaborative economy’ describes a socio-economic system in which individuals are able to share and rent assets or services owned by someone else, either an individual (e.g. Didi Chuxing) or a company (e.g. Mobike). On the other hand, the often used term of ‘sharing economy’ describes only the sharing of assets or services between private individuals, e.g. when a tourist in Shanghai rents an apartment for his stay from a resident outside town via Airbnb. In the following, we will explain where exactly the differences lay in and what other type of sharing belongs to the collaborative economy in China.
Generally speaking, the term ‘collaborative economy’ stands for the sharing and renting economy as a whole. It consists of two different aspects: first, the commonly known ‘sharing economy’ and second, the ‘on-demand rentals’. As previously mentioned, a sharing economy is when individuals share their individually owned assets between themselves. In contrary, on-demand rentals describe business models where individual rents out company-owned assets. This difference of sharing or renting individually or company-owned assets and services leads to yet another difference. While in a sharing economy, there are naturally two groups of users of the particular platform (the individual owners and the individual consumers), with on-demand rentals, there can only be one group of users (the individual consumers of the company-owned asset or service).
The Collaborative Economy Framework by Daxue Consulting
Differences in network effect
On-demand rentals platforms don’t have a network effect like sharing economy platforms do. A network effect is when an additional user of the platform increases the value of another user. For example, Airbnb is a two-sided network consisting two types of users (owners and visitors). Each additional owner increases the value of the visitors as there are more offers of apartments/flats/rooms available from which they can choose. On the other hand, each additional visitor also adds value for the owners that rent out their properties because it will be more likely that the property actually gets booked.
A network effect like this cannot be observed with platforms such as Mobike. There is no second type of user which profits from an additional user of it. There is only one type of users, the riders, that solely depend on how many bikes Mobike drops off in the city and thus, an additional rider doesn’t add value for another rider either. No privately owned bikes are shared.
Differences in demand
Drawing on the example of Airbnb, one can say that a user of their platform can save a lot more money when renting an apartment instead of buying one or going to a hotel than a customer of Molisan, for instance, who rents an umbrella instead of buying one. In the case of Airbnb, this creates a steady demand. The models of Molisan, Xiaodian, Zhulegeqiu etc. rely mostly on convenience as not as much money can be saved when using it. This convenience shall be created by offering the asset always at close reach and a negligible price so the customer is enticed to use it without thinking. However, those platforms are newly established and it is still uncertain how the users will adapt to them.
This uncertain demand for on-demand rentals has another reason as well. Unlike established sharing economy platforms like Didi Chuxing, the demand for most on-demand rentals platforms is dependent on weather or season. While people will always need rides to get to work, the airport etc., people don’t want to ride a bike or play basketball when it is raining, for example. In contrast, people don’t need umbrellas when it is not raining. Therefore, the portable battery-sharing model should show the steadiest demand of the newly established on-demand rentals platforms as there will be always people who need to charge their phone when not being home.
Differences in profitability/profiting
Moreover, e.g. in the case of the bike-sharing model of Mobike or Ofo, there come the costs of maintaining and replacing broken bikes as well. In combination with the unstable demand due to seasonable effects such as heavy rain during the rainy season in the summer, this raises a serious question of profitability. Only if the companies can overcome these challenges, they can go into the black and create sustainable competitive advantage. On the other hand, established sharing economy platforms already showed their ability to perform sustainably. Didi Chuxing is continuously growing since 2012 and was recently valued worth over $ 50 billion after a new fundraising, according to TechInAsia, making it the highest valued startup of China and the second-highest in the world– just behind Uber (优步), the American original of ride-sharing.
But not only differs the profitability of the several platforms, the fact that the assets or services are either individually or company-owned leads to differences in how users profit from using the platform as well. Using sharing economy platforms, the individual owners profit from being able to drop their effective costs through renting out their own assets. Customers profit from utilizing someone else’s asset at very cheap cost. The same cannot be said about on-demand rentals as the company owns all assets. Here, users can only profit from renting assets cheaply. However, as shown before, there is also a difference in how much money customers can save through using the platform.
Differences in market entry feasibility
It is distinct to a sharing economy market that the market collapses rather quickly to one or two leading companies. Also, once the market is matured, it is very difficult to enter it for new entrants. Again, Didi Chuxing is a good example. Due to its large driver and rider base, it could dominate the market and buy out Uber from the Chinese market. New entrants would have to provide a driver base as big as Didi’s to attract riders which use it. However, a large base of customers needed to be provided first to attract the drivers – a vicious circle.
Furthermore, fixed costs, assets, as well as initial capex requirements, are central entry barriers in general. In terms of that, the entry into an on-demand rentals market seems rather easy because initial investments are comparably small. To provide and maintain as many umbrellas, bikes, portable batteries etc. is a lot cheaper and more feasible than attaining a large base of properties, for instance. It is no problem for investors who believe in the business idea to provide for this kind of capex. Another aspect is that there are practically no switching costs for customers, which makes entering such kind of market much more feasible and promising.
Summarizing, it is not surprising that in common tongue the collaborative economy almost always is titled as sharing economy only. Early pioneers of this economy in China were Didi’s ride-sharing platform (founded in 2012) as well the apartment/flat-sharing platform Airbnb (founded in 2008, entered China in 2015) which both are classified as a sharing economy as two groups of individual users share their own assets. However, newly upcoming sharing and renting business models can’t be classified just the same, most of the times they are rather on-demand rentals like the examples of bike or basketball rent-out platforms/apps show.
Nonetheless, whether sharing economy or on-demand rentals – at Daxue Consulting we are experienced in managing innovative business models. We developed Daxuenova, our innovation practice, to work on innovation-related projects. For instance, we already worked on designing a go-to-market roadmap for new types of products or estimating the size of a market for a non-existing type of product for various clients (design thinking China). Using two main methodologies, in-depth interviews with market insiders as well as deep desk-research, our services can greatly apply for the collaborative economy innovation.
Why China will become global leader in the collaborative economy
Despite the question whether most on-demand rentals platforms will be able to create sustainable competitive advantage and achieve profitability, the outlook for the whole collaborative economy in China is more than promising– as shown in the beginning. This is mainly due to two main reasons: first, the affinity of Chinese people for mobile payment and on-demand transportation and second, the governmental support.
Compared to people from the West, Chinese people show a much higher affinity for paying via smartphone. Compared to bank card, mobile payment is much more accepted and popular in China for its convenience, both offline and online. Chinese mobile payments dwarfed those in the United States, being nearly 50 times greater in 2016. According to iResearch, the transaction volume accounted for $5,5 trillion in China, while Forrester Research reported $112 billion for the US. Chinese consumers don’t show any concerns or resistance for connecting their bank account to their phones and apps – mobile payment in China became the norm. This way of consumer behavior fits perfect to the collaborative economy and fosters business ideas based on mobile payment. The fact that platforms are also connected within the giant messenger app WeChat (e.g. Mobike featured in WeChat’s ‘Mini Program’) or Alipay further enhances the use of these platforms.
Didi and Airbnb included in Alipay, enhancing collaborative economy Photo credit: Daxue Consulting
Furthermore, according to Mary Meeker’s 2017 Internet trend report, China’s ride and bike-sharing are not only global leader in terms of on-demand transportation, but they account for an incredible 67% of the global share. Also, in case of bike-sharing in particular, the consumers seem to adapt to it very quickly, despite possible influences of the weather. The report shows a steadily increasing number of users, topping 20 million in March this year, which was an increase of more than 100% month over month. This steady adaptation is also shown in the high frequency of the Chinese using bike-sharing, with 66% making at least three trips a week, according to the report. 16% even make more than ten trips a week.
Another important linchpin of the collaborative economy in China is the support of the Chinese government. It is the goal of the national government to become global leader and therefore, it proactively seeks cooperation with companies operating in the collaborative economy. China is becoming a trendsetter in how to successfully embrace cooperation between the government and the collaborative economy while Western governments fail to do so. The Chinese government is seeking mutual benefits for companies, its consumers and, of course, the government itself. According to the National Development and Reform Commission (中华人民共和国国家发展和改革委员会), one goal is to draft “strategies, plans, and key policies to promote the development of high-tech industry and advancement of technologies” as well as “promoting the technological innovation […] and promoting the formation of new industries of the national economy”. In doing so, China regulates but not litigates the collaborative economy. In fact, it shows a certain “flexibility factor” which is a key advantage compared to the West. The government can quickly disseminate changes in China’s ever-growing marketplace which allows it to adapt the governmental systems to the collaborative economy and form regulations fostering it, instead of clashing with it.
Daxue Consulting’s team in Shanghai’s office. Photo credit: Daxue Consulting.
Contact Daxue Consulting to learn more about the thriving collaborative economy in China. We can also help creating a business plan if you have your own idea for a new sharing and renting platform or help developing your business in China according to the trends shown above.