China is betting on the sharing economy to drive its shift into a service-based economy and a new era of growth
2018 was a tough year for a fair number of Chinese startups in the sharing-economy sector, especially those in bike- and car-sharing.
Last year on May 16, the Transportation Ministry ordered bike- and car-sharing companies to refund users their deposits from June 1, with a respective two- and 15-working-day deadline – dealing an extra blow to those already grappling with a cash crunch.
By then, there were nearly 16m Ofo users waiting to get back their deposits of either RMB 99 or 199. Another bike-sharing startup, Xiaoming Bike, which filed for bankruptcy in July last year, also confirmed this year that it still owed over 125,000 users more than RMB 25m in deposits.
Car-sharing startups faced similar woes. One example is TOGO, which ceased operations and shut down its headquarters in Beijing even after raising over RMB 300m from five funding rounds since 2015.
Despite such bad news dominating the headlines, China’s sharing economy continued to grow strongly – expanding 41.6% to RMB 2.94tn last year from 2017, a State Information Center (SIC) report shows.
The growth of the sharing economy was perhaps not so surprising, considering how the Chinese government defines it. China was the first country to name the sharing economy a national priority, including it in the Government Work Report in 2016 and every year since.
The SIC published its first Report on the Development of China's Sharing Economy the same year, defining it as the sharing of idle resources via internet platforms. In 2017, however, the SIC removed the word “idle” from the definition in its annual report, and the focus shifted to “shared access to goods and services” – a nod to China’s goal to transform itself into a service-oriented economy from a manufacturing-based one.
The meaning of “sharing economy” has become so broad that it even includes online food delivery and other business that would not have been classified as such in other countries. For example, Japan defines the sharing economy as “enabling access to individually owned idle assets.”
Sharing-economy businesses in China have also been buoyed by government regulatory support. Ride-hailing services were given the green light to operate as early as in 2016, making China the first country in the world to do so. In contrast, Uber didn’t have the same luck in the US, as a number of states and cities banned it for passenger safety and other concerns.
At the local level, regional and municipal governments in China have also been ready to support sharing-economy startups. In a bid to boost the use of shared cars by making it easier for users to find parking, the Shijingshan District of Beijing allocated about 400 parking lots to shared cars in 2017, with a total of 600 more to be built in the next three years
The sharing economy has also been seen to create more jobs in China, where unemployment has long been feared as a powerful cause of social unrest. According to the SIC report, among the drivers working for ride-hailing platform Didi, 6.7% originate from registered impoverished households, 12% are army veterans, while more than 21% are the sole breadwinners for their families. Similarly,77% of the 2.7m riders of the online food delivery platform Meituan are from poor rural areas, with 670,000 from poverty-stricken counties and villages.
A ready market
As businesses have tapped internet technology to bring greater convenience to daily life, consumer behaviors have also changed in the process. This has helped lay the foundations for a market based on the sharing economy.
Notably, Chinese have become increasingly reliant on their smartphones to access a fast-growing array of goods and services. In 2018, over 400m users ordered food or booked hotels and other services from the Meituan app alone.
At the same time, consumers prefer personalized services or unique experiences. When traveling for leisure, an increasing number of Chinese are choosing shared homes over standard hotel rooms, generating around RMB 16.5bn in revenue last year.
The younger generation of Chinese consumers is also more than willing to pay for one-time use as opposed to paying for ownership. Owning a car, for instance, is less attractive than using car-sharing services, which is more convenient and offers time and cost savings, especially for younger city-dwellers.
Meanwhile, the shortage of doctors as well as the growing aging but increasingly health-conscious population in China has made shared medical services a necessary supplement to existing hospital and other medical infrastructure. In 2017, the first so-called Medical Mall quietly opened in a commercial complex in Hangzhou, with 13 occupants offering medical services provided by third parties. Qualified and experienced doctors can set up their own practices there, using the ready-made workspaces and equipment.
The year 2016 witnessed the peak of the sharing economy frenzy in China. Ofo and Mobike, two of the most high-profile bike-sharing startups, each secured four rounds of funding in that year alone, raising a total of US$130m and US$220m, respectively.
“Back then, the amount we raised was way more than what we needed. There was too much cash in our bank account, and it was not easy to spend it all,” said an Ofo employee in an interview with The Beijing News.
Such easy money attracted even more startups into the sector. For a while, it seemed that everything, whether it’s basketballs or umbrellas, even benches, could be shared and turned into a business. Around 20 bike-sharing startups, including Chongqing-based Wukong Bicycle, Tianjin-based Bluegogo and Shenzhen-based Baicycle, were launched in 2016 alone.
Although the shared mobility segment has cooled considerably, alongside the struggles and flops of many high-profile startups in the sector, investment funds continue to flow into the rest of the local sharing economy.
According to the SIC report, China’s sharing economy startups raised a total of RMB 149bn in 2018, seeing a decline – of 23.2% – for the first time. But excluding the shared-mobility segment from the data, total investment in the sector still increased by 23.4% to RMB 107.2bn from RMB 86.8bn in 2017.
In particular, shared medical services have become the new darling of investors, seeing a year-on-year growth of 661.8% in VC funding. In April this year, Tencent Trusted Doctors raised US$250m in its latest funding round at a valuation of over US$1bn. It has become China's largest network of non-public online-to-offline clinic facility system where freelance doctors can provide their services.
So while the image of bicycles piling up in “graveyards” continues to haunt the Chinese urban imagination – with those abandoned bikes from bike-sharing startups in Beijing and Shanghai producing nearly 300,000 tons of scrap metal, or equivalent to five aircraft carriers – such setbacks haven’t dampened the country's enthusiasm for the sharing economy.
For Raymond Wang, a partner at the consultancy Roland Berger, the failure of shared mobility startups like Ofo offers a valuable lesson in the evolution of the sharing economy. "As the sharing economy shifts from rapid expansion to focus on improving management and operations, it will gradually play an increasing role in transforming and innovating traditional industries" and lead to healthier business models, he said.
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