Dwindling discounts threaten China’s online consumer paradise

Start-ups are consolidating and no longer need to wage expensive subsidy wars to lure customers

PUBLISHED : Friday, 12 August, 2016, 4:31pm
UPDATED : Friday, 12 August, 2016, 11:00pm

For the past year, Li Weiling has been living large on the cheap in Beijing, thanks to deep-pocketed investors from around the world. 

The 30-year-old advertising professional has been swinging like a sultan on a salary of just 6,000 yuan (HK$7,000) a month: summoning chauffeured cars during the rush hour and getting lunch delivered to her doorstep, all while snapping up cheap movie tickets and just about anything else under the sun.

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Start-ups backed by Baidu, Alibaba – which owns the South China Morning Post – and Tencent once offered steep discounts on everything from on-demand massages to personal trainers. But as consolidation revs up – seen most recently in ride-hailing giant Didi Chuxing’s acquisition of rival Uber’s operations – this golden era for smartphone-wielding consumers is waning. Didi’s deal wasn’t the first merger intended to end internecine subsidy wars, and it won’t be the last – and that means fewer doorbusters for Li and millions of her cohorts.

“The [subsidy] wars have just been brutal. Well, great for the consumer, but brutal in terms of burning cash,” SOSV investment partner William Bao Bean said. “And they’ve trained Chinese consumers to not be loyal, but instead to go anywhere to seek out bargains. Consumer loyalty means nothing in China.”

China’s consumers have taken to on-demand services like no others, as start-ups piled onto the online-to-offline (O2O) bandwagon and waged a furious war of discounts to hook users.

It worked: the so-called Chinese sharing economy was worth US$1.95 trillion last year and involved 500 million people, Didi cited official data as showing.

Yet the discounts will shrink because of two mega trends convulsing the domestic industry landscape: consolidation, and a deepening investment drought. Last year, US$20.3 billion of venture capital surged into Chinese internet businesses, eclipsing the US$16.3 billion that flowed to US internet firms, and that’s after more than quintupling from 2012, according to PriceWaterhouseCoopers (PwC).

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The volume of private equity and venture capital flowing into China’s tech sector, as well as investment in the country as a whole, peaked last autumn. Wilson Chow, a PwC analyst in Shenzhen, estimates that private equity and venture investment may be down about 25 per cent in the first half of this year compared with the final six months of 2015.

Rui Ma, a partner at 500 Startups, surveyed several of the most active venture capital funds in China, who told her their deal volume has halved from last year.

“The slowdown is a global phenomenon, and it’s still ongoing: we’re in the middle of the winter,” said Kai-fu Lee, founder of prominent venture capital firm Sinovation Ventures in Beijing.

“The Chinese market has a tendency to accelerate uptrends as well as downtrends: when things are trendy, they will double or triple quickly – and then when they’re out of favour, they will drop like a brick.”

The slowdown is a global phenomenon, and it’s still ongoing: we’re in the middle of the winter
Kai-fu Lee, founder, Sinovation Ventures

And that spurs consolidation. The on-demand arena has seen a string of multibillion-dollar mergers since 2015: Didi-Kuaidi (ride-hailing), Meituan-Dianping (group-buying and food), Ganji-58.com (classified ads), Ctrip-Qunar (online travel).

All were backed by at least one of the country’s internet troika of Baidu-Alibaba-Tencent, who as investors were said to have orchestrated the mergers to staunch losses.

Chinese food delivery start-up Ele.me valued at US$3 billion after gobbling up US$630m in funding

Uber and Didi alone are estimated to have spent billions trying to undercut each other.

“It’s not that they want to feed the Chinese consumer and give them goodies. They thought the end result would be a monopoly worth a lot of money,” said Richard Lim, a managing partner at GSR Ventures. “So the end justified the means.”

The question now is how consumers addicted to dirt-cheap services will react. Take ride-sharing: subsidies for several popular services have plunged by more than 80 per cent in recent months. Discounts on peak-hour Uber rides in Beijing have dropped to about 1.40 yuan from 8 yuan three months ago, according to a customer’s record.  That means a ride that cost 8 yuan in May will now cost about 13 yuan. Users of Shenzhou Zhuanche, also known as UCar, report that they now get 20 yuan towards their next ride for every 100 yuan deposited into their accounts, versus about 100 yuan earlier this year.

They thought the end result would be a monopoly worth a lot of money
Richard Lim, managing partner at GSR Ventures

Other sectors have begun to cut subsidies as well. Edaixi, one of China’s largest online laundry services, has begun to lay off the discounting, said Zhang Rongyao, founder and chairman of Edaixi’s owner Rongchang Yao China Network Technology Beijing Co. 

“The laundry service can survive without heavy subsidies because of strong demand,” he said. “The key to success in O2O is the size of demand. Laundry and food delivery services are more likely to survive because both businesses can easily scale up.”

Plus, new habits may die hard. Consumers could grudgingly pay up to maintain their lifestyles, even if it means fewer savings in the long run. “If people are addicted to new conveniences, they may find it difficult to go back to the old ways,” PwC’s Chow said. 

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Even if Li, the Beijing advertising worker, does cut back on non-essential services – perhaps going to fewer concerts or movies – the overall market for new services will continue to expand, says Arthur Kroeber, managing director of GaveKal Dragonomics, a research service in Beijing. That’s simply because Chinese economic expansion, even if it decelerates sharply, will continue to fuel the growth of the affluent class. He estimates middle-income households could more than double to 180 million over the next decade.

For now, there are still discounts to be had – in some categories. Li will just have to hunt harder for a service that offers the sweet deals on meals that she’s grown accustomed to. 

“One of them will offer the rates I’m happy with. It’ll just take more time to find them.”