Everyone wants a slice of the sharing pie in China
In 2017, the word for “share” in Chinese, gongxiang (共享), made it onto the list of China’s top 10 buzzwords of 2017. President Xi Jinping praised the expansion of the sharing economy as “a new driving force for the economy”. Worth an estimated $680 billion in 2017 already, the Chinese sharing economy is projected to grow by at least another 30% annually in the years to come. Compare this to the $32 and $57 billion European and US sharing economies in 2017, and you get a sense of just how huge the Chinese sharing industry is. But how did the sector grow this much in China in the first place?
Here are 4 reasons that help explain how the Chinese Sharing Economy became the world’s largest:
1) Companies target customers through mobile channels and large portfolios
Today, China has almost 700 million smartphone users, two-thirds of whom use the mobile payment apps Alipay and WePay. In 2016, Chinese mobile transactions amounted to $45.5 trillion, 50 times higher than in the United States. Mobile transactions and the scanning of QR codes are commonly used to facilitate the utilization of sharing apps.
The appeal of the sharing economy, to both the Chinese state and consumers, is not only the potential profit to be achieved through companies such as Didi Chuxing (a ride-hailing app), YCloset (a clothing app), Ofo and Mobike (two bike-sharing services), but also the consumer data produced by every digital transaction in the shared economy. These can then be used to optimize consumer habits and the channels through which they are targeted.
Moreover, competition between different Chinese unicorns in the sharing space is increasing, as are their portfolios. For example, two of the largest Chinese companies in the digital space, Didi and Meituan (sometimes called China’s ‘everything app’), have each entered the other’s core business, hoping to carve out a larger slice of the pie of the Sharing Economy. Meituan rolled out a ride-sharing business in seven Chinese cities, while Didi launched an app seeking couriers for its then upcoming food-delivery business.
These strategies demonstrates how companies aspire to grab larger market shares through a large scope of services offered by one single app.
Didi Chuxing in China (Source: Roland Berger)
2) China's millennial customer base is both large and in need of Sharing services
China’s 400 million millennials are viewed as the target customers in the country’s sharing economy. They belong to a generation of consumers conditioned to adapt to new things. In cities such as Beijing and Shanghai, the high cost of living and traffic congestion (in both cities, car speed during rush hours averages at around 22 km/h) promotes a preference for convenience over the pride of ownership. Moreover, millennials have more frequent mobility needs, such as for social events, weekend plans or for daily journeys across their cities.
Chinese government regulations on car ownership (such as the one-household-one-car policy of many first-tier cities such as Beijing and Guangzhou), implemented to clamp down on traffic and pollution, create unique pressures in the Chinese market, especially for millennials. According to public surveys, millennials are higher users of transport-sharing services due to their awareness of the concept of sharing and of the limited nature of private vehicle ownership in Chinese first-tier cities. In a Nielsen study, 94% of Chinese respondents said they would be happy to use products or services shared by others.
License plates required to drive a car are granted through a lottery-like online registry in many Chinese cities. Due to the high selectivity of the system, there continues to be a gap between the total demand for cars, and the number of plate holders in China. Based on an estimate by consulting firm Roland Berger, in 2020, there will be 355 million driving license holders but only 195 million vehicles. The Sharing Economy is and will continue to be a mobility solution for license holders without a private car.
Typical users in China’s sharing economy (Source: Roland Berger, Uber, Havas Worldwide)
3) The Chinese government makes large efforts to realize the sector’s potential
The Chinese Sharing Economy is defined by a large level of government involvement and responsiveness. Quick in realizing the sector’s potential, the Chinese government granted it legal status in summer 2016.
Having framed the sharing economy as a “national priority”, Chinese public officials are pursuing this new economic engine to account for 10 percent of the national gross domestic product by 2020, and 20 percent by 2025.
At the same time, the government has also introduced regulations where necessary: In spring 2018, after a Chinese flight attendant was murdered by a Didi Driver, the public sector took note of some of the associated problems within the sharing industry. For example, the Ministry of Transportation has in recent months become more concerned with driver accountability, mandating that it could investigate ride-sharing platforms for security reasons. If failing to comply, companies can now have their apps removed from online stores.
4) It boasts “Chinese Characteristics”
In the West, the “Sharing Economy” is often defined as idle and unused assets being utilized within a community. In China, rather than increasing the utilisation of existing infrequently used assets, large sharing companies instead tend to create new assets, such as clothes, bikes and cars, and often an excess supply of them. The two bike-sharing giants Ofo and Mobike are prime examples of these tendencies. Both are over-producing bicycles which are now swamping first-tier cities in a landfill-like manner. According to the People’s Daily, over the last three years, more than 20 million bikes were put onto China’s streets. Many of them ended up in one of the so-called “bicycle graveyards”.
Looking ahead: Potential Pitfalls lie within the sector’s long-term sustainability
The Chinese Sharing Economy will continue to grow, and companies are likely to optimize their outreach to customers.
However, it might also be at risk of rapidly losing diversity as a couple of powerful companies consolidate their services. Observers have assessed that there are some warning signs that China’s Sharing Economy has reached peak growth and that the coming months will see a wave of bankruptcies and consolidations as many start-ups built on unsustainable models fold. This risk could already be seen in the bikesharing sector: one of the most attractive destinations for investments in the sharing sector, it has also been the source of some of the Sharing Economy’s greatest casualties. Out of originally more than 100 bike-sharing companies, only three remain contenders to survive future price wars: Ofo, Mobike, and Hellobike.
The sharing market is therefore at risk of becoming saturated - increasingly offering services that have little to do with “sharing” or even matching clients’ needs. The same applies to large ride sharing companies worldwide, including Didi Chuxing, Uber, and Grab. Massive expansion worldwide of service delivery is an agenda-staple for most of the Sharing Economy. However, if these companies’ revenues cannot keep up with their massive expansion (Mobike, Ofo, and Didi are all expanding abroad as well, with success still pending), they could easily enter bankruptcy.
Lastly, digital startups in the sharing sector also struggle with theft and vandalism. Wukong, a failed bike-sharing company, reportedly lost 90 percent of its bikes in just six months. Some observers associate such tendencies with the fact that China’s population today has lower levels of social trust than previous generations, thereby creating a space in which the spirit of sharing is in short supply. Even in a sector that is built to thrive on this exact spirit.