China’s sharing economy could run into trouble
From homes, offices, bikes, power banks, umbrellas and even basketballs, start-ups in China are now taking the concept of sharing into a new level as the world’s second-largest economy embraces the new economic model much faster than any other countries.
China’s State Information Center estimated that the value of the so-called “sharing economy” could grow by 40% annually over the next few years, accounting for over 10% of the country’s gross domestic product by 2020, and create a number of business conglomerates across sectors.
Despite some initial scepticism, the concept of collaborative consumption has received a warm welcome from the public. The fast-growing popularity of taxi-sharing app Didi Chuxing and bike-sharing platforms such as Mobike and Ofo are good examples of how the concept is changing everyday life.
But few have noticed that China’s sharing economy is evolving in a way that might not be sustainable, underscoring the heightening risk for venture capital firms investing in some of these start-ups.
Didi Chuxing, Uber and Airbnb (known as "Aibiying” in China) are among the first wave of companies tapping into the sharing business. They operate in a similar business model – serving as a platform to match suppliers and users, but do not own the assets themselves.
Such asset-light model means operators do not have to make large investment in fixed assets, leaving a large portion of their spending for technology development as well as marketing and advertisement.
Meanwhile, some of them can charge both the users and the asset owners. For instance, Airbnb charges hosts 3% to 5% and guests 6% to 12% on every transaction. Didi Chuxing mainly charges taxi drivers for using its service, but it also gains indirectly from passengers by sharing a slice of the extra payment paid to taxi drivers during peak hours.
Sharing economy 2.0
Their success has attracted more start-ups to join the sharing economy, albeit in a distinctly different model that some regard as sharing economy 2.0. China’s red-hot bike-sharing companies, as well as battery and umbrella-sharing firms, are typical of the new group.
One of the key differences is asset ownership. Most new start-ups joining the business are also the owners of the assets, making them no different from conventional leasing companies.
They are often considered part of the sharing economy ecosystem because their products are leased for a short period of time, giving an impression that the product itself is shared between multiple users.
If a bike is used four times in an hour, many would consider the bike is “shared” by the different users during that period, instead of the bike being leased to four different users.
From an investment perspective, the sharing economy 2.0 model would require hefty upfront investment on fixed assets in addition to developing and running an online application. Their income stream is also limited to the users because they are literally the suppliers themselves.
Some critics have pointed out that the business model of bike-sharing alone does not really make any economic sense because of the extremely low charges levied. Most bike-sharing companies charge users Rmb1 (15 US cents) every hour.
The model has to be supplemented by profits generated from managing the customer deposits as well as selling riders’ information to shops and restaurants for targeted advertisement.
Over-expansion
Bike-sharing might be the last business to succeed in China’s sharing economy boom, as sharing of many new products are clearly not commercially viable.
Mobile power chargers, umbrellas and basketballs are some of the products that hit China’s sharing economy market of late. There is a trend that demand for each new product falls as the sharing craze expands to ever more unlikely products.
Zhao Shuping, founder of umbrella-sharing company Molisan, openly admitted that leasing umbrellas alone is not profitable. He is counting on most of the revenue coming from advertisement on the company’s mobile app and on the umbrellas.
Still, that does not sound a very appealing business. When the use of umbrellas is confined to those who do not have one during rainy days, it remains doubtful how much the business can grow.
Even more so for basketball-sharing, which does not seem to make any business sense.
China’s sharing economy boom has attracted many young entrepreneurs hoping to replicate the success of Didi Chuxing and Airbnb.
But when the idea is used so many times that new start-ups are going for products that are seldom used, it may suggest the sharing frenzy may soon come to an end.