China’s hostile environment for Western tech pushed out Amazon and Airbnb, but competition remains the biggest challenge
- An increasing number of Western internet firms are calling it quits in the world’s second largest economy, citing Covid-19 and a tougher regulatory environment
- More recent challenges just tell part of the story, according to analysts, who say platforms like Airbnb, Amazon and Uber were outcompeted by local rivals
Just by the size of its economy and population, China has long stood as a market that global businesses cannot afford to ignore. Yet a string of recent exits, including Airbnb and Amazon, shows the country is increasingly becoming a cautionary tale for multinational firms.
While economic reforms started almost half a century ago, a recently emergent middle class has made China even more appealing to many global firms seeking a toehold in the world’s second largest economy. Not even one of the strictest censorship regimes in the world has been enough to deter internet giants. Mark Zuckerberg, founder of Facebook owner Meta, was still courting favour with Chinese officials as recently as 2016, when he went for a highly publicised jog in Beijing through air thick with smog.
While Zuckerberg never succeeded in launching his social media services in China, many other internet giants have tried their hand at the market only to flee years later – and the number of retreats are rising. A combination of an increasingly intrusive regulatory regime, fierce competition from local rivals, and shifting Chinese consumer preferences has pushed many firms to throw in the towel.
“China’s severe lockdown and Covid restrictions are just some of the contributing factors to Airbnb’s exit, but they hardly constitute the main reason,” said Angela Zhang, an associate professor of law at the University of Hong Kong. “The fundamental reason has to do with the stiff competition that Airbnb faced in the Chinese internet market from indigenous rivals such as Meituan and Ctrip.”
Airbnb rivals Meituan, Trip.com-backed Tujia and Xiaozhu all said they would take over for some landlords that previously listed on US-based platform.
Airbnb is hardly the only one to decide that such challenges are no longer worth the expense, as a slate of recent departures illustrates.
News of Airbnb’s plan to exit China came as a surprise to Yang Pili, who started renting out a vacant bedroom on the platform in 2019 in her hometown of Lanzhou, a historical city in northwestern Gansu province. Yang entrusted the management of the listing to her mother, who was looking to keep busy after retirement.
“My mother has been a Superhost for two years and had quite a lot of fun hosting travellers from across China and the world,” Yang said. “But I guess it’s reasonable under the current Covid-19 situation in China. We haven’t had any guests in the past year because of the pandemic.”
“There are a lot of restrictions for travelling in China because of the pandemic, and the situation is not getting better soon,” she added.
Airbnb specifically cited Covid as the reason for closing up shop in China. Stays in the market accounted for just 1 per cent of the platform’s total revenue in recent years.
The market transaction scale in the shared accommodation sector decreased by 3.8 per cent year on year last year, mainly from the impact of the pandemic and regulation, according to a report published by China’s State Information Centre in February.
However, as with other tech companies, Airbnb has been plagued by challenges with localisation and rising competition from domestic rivals.
Alibaba is the owner of the South China Morning Post.
Airbnb’s weakness in localisation was its main failure in China, according to Tong Wenhao, an analyst at research firm LeadLeo.
“The discount Airbnb offered was not as high as those local platforms, so consumers preferred to turn to Fliggy and Trip.com,” Tong said. “It is easier for those local platforms to win the trust of consumers because of their years of experience in the travel industry.”
That is one of the key weaknesses shared by foreign internet firms such as Amazon and eBay, which have been expanding globally but failed to crack the China market, according to Tong.
Amazon’s main failing, according to Tong, was trying to import its Prime subscription model in 2016. Free shipping was already common at the time, he said, so asking for 288 yuan (US$43) per year for the privilege was not worth it for many consumers.
“It’s difficult for Amazon to gain a foothold in China when the consumers make the simple comparison,” Tong said.
Tong also noted changes in the way consumers shop online in China. Alibaba’s Taobao is a leader in the burgeoning live-streaming e-commerce market, for example, while Amazon has invested little in this field. This inability to adapt has meant less visibility for foreign internet brands.
“Airbnb also has less publicity on popular domestic social media platforms and does not have a comprehensive platform like Alibaba’s Taobao to attract more traffic,” Tong said.
However, expertise in localisation is not a guarantee of success. Uber had a highly independent subsidiary operating in China and a partnership with domestic internet search giant Baidu. After an intense subsidy war with Chinese peer Didi, however, the global ride-hailing champion finally bowed out of the market.
“Uber was by far the most successful because they had the most localised operations, and their market share was significant,” said Rui Ma, an angel investor and founder of Techbuzz China Podcast. “The organisation was very flexible and decentralised, and I think they had a relatively good outcome.”
Uber’s experience suggests good localisation alone might not have been enough to save Airbnb in China.
“One can always increase one’s odds by being more localised, but in this instance I’m not sure that would have been too helpful given the amount of well-funded competition,” Ma said. “China is a very expensive market to fight in when you have dedicated and well-funded competitors.”
When LinkedIn shut down in China, it cited “a significantly more challenging operating environment and greater compliance requirements in China”.
In the less political sphere of hardware, however, there are still success stories for foreign firms in China. Apple remains the No 3 smartphone brand in the country, selling 13 million iPhones in the first quarter of 2022, according to Counterpoint.
Electric vehicle maker Tesla is also a market leader, remaining far ahead of local rivals like Nio, Xpeng Motors and Li Auto. The three Chinese carmakers sold a combined 280,075 vehicles in their home market last year, 13 per cent less than the 321,000 Teslas sold in the country.
Still, a mix of risks and uncertainties make China a difficult environment to operate in. LeadLeo’s Tong said that while he expects more foreign internet firms to leave China, it is an enormous market that will continue to lure companies in the long run.
Angel investor Ma is more optimistic about Chinese companies globalising than she is about international companies entering China.
“China has a sufficiently different ecosystem now from the rest of the world that it will be quite complex to navigate … I think only companies with differentiated, advanced technology or very strong branding would find it worth their while,” Ma said.
“Globalising outward is different – China has some good business models in e-commerce and digital entertainment that could be exported with success, especially when you take into account the supply chain advantage.”