In the previous article (you can read here), I laid out some basic theory for how platform businesses compete. Based on this thinking, I think Airbnb should do 6 things differently than Uber in China.:
#1: Airbnb will need to crack the code for Chinese home-sharing.
Unlike in ride-sharing and taxi-hailing, the right services and pricing for home-sharing in China are still unclear. This is the biggest difference between Uber and Airbnb’s situation in China.
When Uber entered China in late 2014, Kuaidi and Didi already had riders in hundreds of cities (mostly through taxi hailing). Didi and Kuaidi had mostly solved the services, features, and “chicken-and-egg” problems. Pricing still wasn’t clear as they were using venture capital money to subsidize drivers, build critical mass and kill off competitors. By the time Uber entered, it was mostly a question of who was going to get to scale first – and achieve a network effect and economies of scale. The services provided were pretty clear.
However, in Chinese home-sharing, this question is still unclear. Market leaders Tujia and Xiaozhu have not gotten big adoption (450,000 listings and 100,000 listings). They have struggled both to get quality listings on their platforms and to convince travelers to stay in other people’s homes. In particular, they have struggled with a big lack of trust in the market. Also, keep in mind, hotels in China are quite cheap, which is a big difference with home-sharing in the West. Short-term rentals, especially in vacation spots, are also a big established business in China, albeit run in a B2C manner.
As a result, the business models seen today in Chinese home-sharing are pretty different. Xiaozhu is kind of like Airbnb (a C2C model), but they also offer renovation services to get quality home listings. Xiaozhu staff will actually go and decorate the home listings themselves. It is basically a C2C platform with lots of additional services.
In contrast, market leader Tujia is mostly a B2C model and much more like a short-term home rental service. They work with property developers and many of their listings are properties within holiday resorts, often owned by asset management companies. They also directly control their core listings. On the traveler-side, they are more focused more on vacation rentals and holiday housing for families. There are actually a lot of standardization and quality benefits with this type of B2C approach.
Basically, nobody has cracked the code for Chinese home-sharing yet. And as mentioned in Part 1, this is fairly common in two-sided networks. It is often the 3rd or 4th entrant that gets it right, not the first mover. And if they do figure it out, they still need to get around the chicken-and-egg problem.
Airbnb is arriving in a still nascent home-sharing market in China. This is good for them and a much better situation than Uber faced, basically playing catch-up to Kuaidi-Didi. Airbnb will need to crack this code ASAP. And they may need to drastically change their business model to do so. The quality and independence of their China management is going to be a critical issue.
#2: Airbnb should focus first on dominating China’s outbound home-sharing market.
In 2015, over 110M Chinese tourists flew overseas – where they stayed in hotels, short-term rentals and / or home-shares. Note: over 50% of tourists in Asia this past year were from China.
This part of the market is much clearer. First, one side of the platform (the listed homes) is already in place. Second, the price differential for home shares versus hotels in places like New York and London is much more compelling. Especially for families. And third, the chicken-and-egg problem is already solved. The international platform is up and running.
Uber did not have this type of cross-border market in China. Airbnb does and should try to dominate it quickly.
Airbnb’s first line of attack can be a horizontal attack on travel agencies (an MSP vs. VI attack). They can use their big MSP to subsidize the prices to Chinese tourists currently using travel agencies and packages. Chinese tourists do not really travel independently yet. They prefer flight and hotel packages (plus visa and other services). Organized tour groups are also popular.
However, two MSP competitors are operating in this space, Ctrip and Zhubaijia. Zhubaijia offers all-in-one outbound services, including accommodations, car rentals and customized guided tours for Chinese travelers. They are bundling home-sharing with other services. And they are providing quality control for Chinese families on their trips, such as convenient locations, quality checks, security, etc. However, Ctrip is the big competitor and will discussed in the next section.
Uber never had this type of cross-border market when it entered China. The ride-sharing market is mostly locally. I would argue it is mostly city-by-city. Adding drivers in Chengdu doesn’t really benefit riders much in Beijing. But home-sharing is a naturally international market. So Airbnb should focus on this outbound segment. The market is big and clear – and they have strong advantages already in place.
#3: Airbnb should worry about Ctrip. This is their biggest threat.
In September, Airbnb announced it has had “a 500% increase in outbound travel from China in just the past year.” They also said “since 2008, there [has] been over 2 million guest arrivals from China at Airbnb listings worldwide.” These numbers strike me as pretty suspect (if you have good numbers in 2016, you don’t point all the way back to 2008). But let’s assume they have some decent adoption in China today.
As mentioned, there is no chicken-and-egg problem for Airbnb cross-border. They already have an international network of apartments and guests. And, most importantly, they already have many of the strengths I mentioned in Part 1: a network effect, economies of scale in operations and marketing, a full suite of features and services, an ability to bundle services, and an ability to subsidize across their MSP.
I don’t think Chinese competitors can compete with them internationally in home-sharing. It is very difficult to launch an international two-sided network in general. But to do so against an entrenched incumbent is next to impossible. So I think Tujia and Xiaozhu on their own have very little chance against Airbnb outside of China. However, Ctrip is a serious competitor internationally. They are making moves in this area (i.e., their recent acquisition of UK-based Skyscanner). They also are the largest investor in Tujia.
Ctrip should worry Airbnb. My next article on the US-China platform wars is about Ctrip vs. Expedia internationally. I will discuss this more there.
#4: Airbnb should try to marry Alibaba or Tencent – preferably both.
When Uber entered China, Kuaidi and Didi were already partnered with Alibaba and Tencent. Their ride-sharing services were integrated, to some degree, into these big ecosystems. As mentioned in Part 1, complementary and inter-linked MSPs can be a big advantage. Uber, in contrast, was not even available on Wechat at certain times. It is worth remembering that the BATs carry over 50% of all the mobile data traffic for China. Being on these big platforms matters.
However, Tencent and Alibaba are still unattached when it comes to home-sharing (mostly). Tujia has backing from Ctrip (and therefore Baidu, sort of). But Alibaba and Tencent are the bigger platforms and are mostly unaligned.
Airbnb should partner with Alibaba and / or Tencent today. Lock one or both of them up. Integrate your service with their ecosystems as much as possible. This is a very big deal. And as Airbnb China is now a separate business, they could sell part of that to Alibaba or Tencent.
#5: Airbnb should subsidize Chinese travelers and start a money war.
Airbnb already has two big groups of users internationally (listings and travelers). Currently, Tujia doesn’t really have scale in either group (in terms of revenue). So Airbnb should subsidize prices to Chinese home-owners and travelers. Offer prices that will encourage usage and that Tujia and Xiaozhu simply can’t match.
This approach can be amplified with raised capital. Airbnb has a big fundraising advantage over Tujia and Xiaozhu. At a +$30B valuation, it can raise $1-2b with little dilution. The local players probably cannot match this.
Basically, Airbnb China should start a money war – and use subsidies to both drive adoption and kill competitors. But this does depend on figuring out the pricing and services equation first.
Recall, much of the Uber vs. Didi fight was really a money war. It was about who could outspend the other in driver and rider subsidies. And as neither could outspend the other, they eventually sued for peace. However, Airbnb can outspend its current China rivals and it should. However, Ctrip will be a problem in this regard.
#6: Airbnb should “be like Travis” in attitude.
Finally, Airbnb should copy the attitude of Uber CEO Travis Kalanick in China. Chinese companies will often bleed the foreigner in terms of cash to see if they will give up and go home. It’s a common tactic. To his credit, Travis made it clear he was coming to China to win. He spent $2B fighting Didi. He showed total commitment. And very quickly, everyone gave up on the idea of scaring him off. Note: He would never had walked away with 18% of Didi if there was any doubt about his willingness to keep fighting.
Airbnb will need to show this same “burn the boats behind us” total dedication to China.
So far, the Airbnb team in China has not done this. They have been cautious in their statements but they look pretty good overall. Their new China head is a China veteran. They have the right backers (Sequoia Capital, China Broadband Capital). They have said they are staffing up to +300 people in China (still only 10% of Tujia’s staffing). Overall, things look good so far. But I argue they will eventually need to write big checks and show a Travis-like attitude.
If they do this, then there are probably two outcomes for them. They will win the market or they end up with significant minority stake in the China winner (like Uber did). Both are great outcomes. Keep in mind, Uber’s stake in Didi is already worth $7B. And will could be worth a lot more than that one day.
Thanks for reading. Cheers, -j
I write (and speak) about how rising Chinese consumers are disrupting global markets. (#ConsumerChina). This also includes work on:
- “China 2025″ – what a region transformed by Chinese consumers, companies and capital is going to look like. (#China2025)
photo by Alexis, Creative Commons license with link here.