Airbnb founders forge ahead in China alone while rival Tujia waits in the wings
China’s home-sharing market is red hot but fiercely contested and domestic players are leveraging their knowledge of local conditions to pressure Airbnb
Airbnb Inc.’s founders were moments away from merging their China business with local competitor Tujia in January 2017. Executives and investors spent hours hashing out a deal. Preliminary term sheets were drawn up. Then in the final hour of negotiations, Airbnb pulled out.
Investors had hoped a truce would stop the companies from haemorrhaging money in the fight for control of China’s blazing home-sharing industry. But rather than take a page from Uber, which agreed to cede China to rival Didi in exchange for an equity stake, Airbnb Chief Executive Officer Brian Chesky had a change of heart and decided to forge ahead in China alone.
Sixteen months later, the decision still rankles investors and has further emboldened Chinese rivals, according to people close to both companies. Tujia remains keen to cut a deal – although both sides deny formal talks – and says it’s simply waiting for Airbnb executives to accept reality. “We would love to issue shares in Tujia in exchange for Airbnb’s China operations,” says Tujia Chief Financial Officer Warren Wang. Until Airbnb is ready, “we will prove ourselves and show our muscle,” he said. “If Airbnb needs more time to understand that they or any other foreign tech companies just can’t do that well in China without a local partner, once we show them they’ll sit down and talk about a deal.”
Airbnb says it’s making strides in China, more than doubling the number of Chinese guests staying at Airbnb properties and boosting listings in China by 125 per cent to 200,000 from a year before. The company declined to disclose sales growth but pledged to continue making aggressive investments in China.
But the market is fiercely contested, and domestic players like Tujia, which is backed by China’s largest travel operator Ctrip.com International Ltd., are leveraging their knowledge of local conditions. Airbnb, meanwhile, doesn’t have a China chief: The previous one stepped down last year after dating a subordinate, people familiar with the matter said. Airbnb is struggling to find a replacement with international experience who also knows the local market. People with such attributes tend to want to run their own businesses and balk at being a hired gun beholden to bosses in far-off San Francisco.
For now, co-founder Nathan Blecharczyk is running the show in China. The 34-year-old travels to Beijing monthly. He oversees 140 people working in a plant-filled Beijing office stocked with Hoegaarden beer, coconut water and fresh fruit. “As a co-founder I had a moral authority to make things happen in China and push forward,” Blecharczyk told Bloomberg in March. Still, he said toggling between China and San Francisco would be difficult long-term. He stopped trying to learn Chinese after a month because the tones didn’t stick in his head. “I’m sure we’ll find a great leader in China,” he said.
Home-sharing in China differs from the US and Europe, where travellers are accustomed to a rich bed-and-breakfast culture and many hosts rent out their primary homes while they’re away. In China, hosts don’t want strangers in their own homes. Instead, home sharing has thrived because a national building boom left a glut of empty flats in the hands of real estate firms and property investors. With homes vacant, local home-sharing companies are tapped to clean, list and manage properties. There’s little to no owner-guest contact. Property quality varies widely.
Without any national regulations around the homestay business, companies have to navigate the whims of local, provincial and national governments and police forces. The three biggest companies – Tujia, Alibaba Group Holding Ltd.-backed Xiaozhu and Tencent Holdings Ltd.-backed Meituan-Dianping – are spending heavily on marketing and discounts. Tujia, which has distribution deals with Ctrip, Expedia and Qunar, doesn’t expect to break even until the end of 2019. The company remains dependent on venture capital money.
Initially, Airbnb operated a skeleton operation in China with 30 people, focused on attracting mainlanders going overseas. Chinese tourists took 131 million overseas trips and spent US$115 billion abroad last year, according to the China National Tourism Academy. But after noticing a surge of Chinese tourists using Airbnb abroad and thriving local home-sharing apps, the company in 2015 decided to expand its domestic China business. It’s a market well worth chasing: The domestic tourism industry took in 4.57 trillion yuan ($710 billion) in 2017, up 15.9 per cent from the year before, according to the China National Tourism Administration. Unlike small hotel rooms, home stays let Chinese travel with extended families, cook Chinese fare and bring pets.
Airbnb tapped LinkedIn Corp. co-founder and board member Reid Hoffman to help navigate a government that has been hostile to the likes of Facebook Inc., Twitter Inc. and Google. LinkedIn and Airbnb are among a handful of American tech companies still operating in China. Like LinkedIn, Airbnb acceded to official demands: incorporating as a separate Chinese entity, sharing information such as passport numbers and guest whereabouts with authorities, storing that data in Chinese rather than US servers. Those decisions have been criticised, but Airbnb remains happy with its choices. “From the beginning, we decided what we were comfortable committing to and made that clear to Chinese authorities,” Blecharczyk said.
Less controversially, Airbnb’s local operation – known as Aibiying – lets travellers log in with the popular messaging service WeChat and rent rooms using the Chinese payments service Alipay. Airbnb plays by the same rules as hotels, which pay taxes, and prizes partnerships with local governments. Airbnb’s policy team spent almost two years courting officials in Guilin, home to celebrated rice terraces. “We want to promote Guilin to the whole world, and a local company doesn’t have the kind of valuable global network Airbnb has,” says Guilin tourism chief Luo Jianzhang, who first heard of Airbnb when his daughter used it to rent a flat in France.
In an effort to differentiate itself from rivals, Airbnb says it’s emphasising quality over quantity. This year, the company visited thousands of homes and kicked out several thousand that didn’t meet its standards. Airbnb is marketing itself as a provider of high-end accommodation. In March, the company rolled out its premium service, Airbnb Plus, in China. About 100 Chinese social media influencers showed up at a Shanghai restaurant to snap photos, sip cocktails and nosh on pink macaroons emblazoned with Airbnb logos. “Top-line growth is the easiest thing to demonstrate performance, but as we get bigger globally, we have a reputation to protect,” Blecharczyk said. “In China, we chose slow and steady over fast and unsustainable.”
Maybe so, but Airbnb is locked in an expensive battle with its deep-pocketed local rivals. Tujia, Xiaozhu and Meituan-Dianping are all spending heavily on promotions, discounts and advertising. They’re recruiting hundreds of people as they push into the Chinese hinterland and across Asia. Blecharczyk wouldn’t disclose the company’s China cash burn but said it’s spent less than local competitors but more than it spends in other markets. (Uber burned at least $2 billion in China.)
The whole point of the proposed marriage with Tujia was to prevent this war of attrition. The companies planned a joint venture commensurate to the economic contributions of Airbnb China and Tujia. Airbnb would have owned 70 to 80 per cent of the China business, with Tujia owning the rest, according to people familiar with the discussions. Key deal criteria included operational and technology responsibilities, voting rights, management selection and the capitalisation of the new entity. The companies planned to sign final documentation and announce a deal in February 2017. Tujia wanted to move quickly because it had agreed not to raise more money to avoid dilution.
It was Chesky who pulled the plug, these people say. He worried that Airbnb would lose control of its carefully curated brand, they say. One investor likened Chesky’s attitude to someone who couldn’t commit to a long-term relationship.
Shortly after Airbnb pulled out of merger talks, Tujia raised $300 million in financing from Ctrip and investment firm All-Stars Investment, garnering a $1.5 billion valuation last October. Tujia says its business has been growing three times as fast as Airbnb’s and that it now has 1 million listings in 300 Chinese cities and 1,000 overseas locations including Japan and Thailand. About 700,000 of the listings are inside China.
Critics say Airbnb remains out of touch with the local ground game. Without a Chinese partner, they say the company will struggle to operate in the grey zone of an unregulated home-sharing industry. It has to be careful to avoid getting kicked out of China like other American tech companies. As a Chinese company, Tujia says it’s more adept at knowing when to push and when to hold back. It says it has closer connections with government officials and people working with police departments, local and federal governments.
Tujia is also working with authorities to install special locks on rental properties, which let customers use government-issued identification cards to enter rentals. ID cards are run through a national database, and guest identities are confirmed with facial recognition software. This way, Tujia can help authorities track travellers’ whereabouts. Tujia is well-funded and doesn’t need to raise capital, but could pursue an IPO as soon as 2019, Wang says. It wants an Airbnb partnership not for the money, but because the global exposure could distinguish Tujia from local competitors.
Airbnb declined to comment on a Tujia tie-up, and Blecharczyk has said Airbnb isn’t persuaded by the need for a Chinese partner. He recognises Airbnb’s shortcomings but scoffs at doubters who say US tech companies can’t thrive in China.
“How can Airbnb succeed if we’re not moving as fast and not spending as much money as competitors? Our global network is something no one else has,” he said, referring to Airbnb’s 5 million listings worldwide. “It might seem like an impossible task, but I actually do think there’s a path to be No. 1 in China.”