Meituan officially launched its own ride-hailing APP Meituan Dache (美团打车Meituan ride-hailing) for Shanghai and Nanjing’s markets.

Meituan Dianping is a Chinese website and APP for food delivery services, consumer products and retail services. As a very typical representative of mobility in China, Meituan Dianping was originally called Meituan. After merging with Dazhong Dianping it changed its name to Meituan Dianping.

As a leading food delivery APP, Meituan also started to develop its ride-hailing service in China, which is a significant step of its business strategy to improve the system of mobility in China. Meituan Dache, Meituan’s ride-hailing app in China, ranked third in the App Store Free download list after its official launch in Shanghai for a week in February, 2017.

On March 21, 2018, Meituan officially announced its first batch of expansion cities of new ride-hailing business, including Beijing, Shanghai, Hangzhou, Xiamen, Chengdu, Fuzhou and Wenzhou. Also, Meituan began to recruit drivers in these cities. However, the plan was not implemented after a year-long period of stagnation.

Challenges for Meituan: Competition and regulations

After entering Nanjing, Meituan heavily subsidized the drivers to grasp more opportunities to compete with Didi. Also, Meituan divided the drivers into three levels and gave different subsidies accordingly. For instance, at the beginning, the standard earning for new drivers was 2,200 yuan per week. After reaching the standard, the drivers can get 800 yuan extra bonus per week.

Hence, the cost associated with its ride-hailing drivers increased exponentially, from 290 million RMB in 2017 to 4.46 billion RMB in 2018, with an average monthly investment of 370 million RMB in 2018.

Date Source: Meituan Dianping 2019 annual report – Meituan’s ride-hailing driver related costs (million RMB)

In order to expand the market share quickly, Meituan launched a price war against Didi through subsidies in Shanghai and Nanjing. But the war did not last long since Meituan cut its subsidies shortly after. To maintain its market share in Nanjing and Shanghai, Meituan lost 50 million dollars per month. Additionally, the transportation sector intervened and warned Meituan against disturbing social order by starting price wars.

The Meituan Dache APP drained Meituan’s finances

According to the Q1 2019 financial report released by Meituan, the new Meituan business, including the travel business, spent 31.3% of the sales cost but only contributed 20.8% of the revenue. This added to a total loss of 439 million RMB in Q1 of 2019.

The cost of sales of Meituan new business decreased from 5.2 billion RMB in Q4 2018 to 4.4 billion RMB in Q1 2019 and the revenue also decreased from 4.2 billion RMB in Q4 last year to 3.9 billion RMB in Q1 2019.

As for the two financial figures, the report explained that it was mainly due to the significant reduction of subsidies for ride-hailing services in China in Q1 2019 and improved profit margins of new businesses and other divisions. Meanwhile, Meituan will continue to restructure mobike’s overseas business in order to reduce the loss of the bike-sharing business.

Merged to Meituan APP from Meituan Dache APP

Since late April 2019, although Meituan’s ride-hailing endeavor has once again been launched in Nanjing, Shanghai and other 17 cities, it is no longer the former Meituan ride-hailing APP. Meituan Dache was transformed from the self-management team to an aggregation platform.

The new Meituan ride-hailing APP in China provides travel services for users by accessing travel service providers such as Caocao travel service, Shouqi car-hailing service and Shenzhou special car service. This means that Meituan no longer did its own business, but instead became an aggregation platform.

Users can go directly to ‘ride hailing’ from the restaurant booking page, which allows them to call a car in real time or for reservation. Meanwhile, users can choose from a menu of car types including taxi, economy, comfort, business and luxury by Shouqi Taxi, Caocao Taxi and Shenzhou Private Car.

Source: Meituan App open interface

If the users of Meituan ride-hailing want to call a cab to a restaurant, they can also directly click the ‘ride-hailing’ button on any restaurant business page in the Meituan APP. The system will identify the location of the user and the address information of the restaurant, automatically fill in the starting and ending address. As a result, Meituan created a ‘one click’ solution to call a car directly to the restaurant, all within the same app.      

Didi Chuxing started its food delivery business in China

Source: losborgia.com – Didi launched the food delivery business in China

Didi Chuxing Technology Co., formerly named Didi Dache, is a Chinese transportation company. As the leading company in ride-hailing in China, Didi Chuxing (滴滴出行) launched its food delivery service locally. On March 6, 2018, the first 9 cities to launch Didi Takeaway (滴滴外卖) were Wuxi, Nanjing, Changsha, Fuzhou, Jinan, Ningbo, Wenzhou, Chengdu and Xiamen. Didi Takeaway wanted to win the first batch of merchants and users by reducing commission and issuing rewards. Wuxi city was the first target city for Didi, in June 2018, and then Didi entered Nanjing, Taizhou, Chengdu and Zhengzhou in July. Didi Takeaway has posted their discounted information on the platform, such as 1 RMB ice cream, 2 RMB tofu pudding and 2.5 RMB barbecue. These discounts have helped Didi attract many users in a short time. However, Didi failed to enter the sixth target city, Ji’nan, due to the low profitability in previous five cities.

So far, Didi has not entered a sixth city and the previous five cities are still operating normally. Nevertheless, according to consumers, because the subsidies lasted only a short time and there were only a few merchants in the app. Additionally, some said Didi poorly designed the interface of the takeaway platform, hence Didi delivery was largely forgotten in the market.

Didi has invested 1 billion rmb in food delivery service in China in 10 months

In December 2017, Didi launched their food delivery business in China. Some people think that as Meituan entered the ride-hailing market in China, Didi fought back by entering the food delivery Chinese market.

There have also been media reports that profitability of UberEats, a food delivery business run by its international rival Uber,  inspired Didi.

However, although Didi invested more than 10 billion rmb in food delivery business in China, the result wasn’t as good as expected. On 15^th February 2019, Cheng Wei, founder and CEO of Didi Chuxing, announced that Didi will focus on its most significant ride-hailing business in China, continue to increase investment in safety and compliance while improve efficiency, so the non-core business may be closed.

Didi will shift the market for its food delivery business abroad

Mobility in China is becoming more mature and competitive. As a result, companies try to develop into overseas markets. Didi launched its food delivery service ‘Didi food’ service in Osaka, Japan in April 2020.

Source: Twitter.com – Commercial of Activities by Didi post on twitter in Japan (Summer delicacies for you to eat! Activities in progress)

Meanwhile, DiDi Food announced its expansion to Aguascalientes, Toluca, Chihuahua, Torreón, and Saltillo in Mexico on 22th April, 2020. So far, the company has already been operating in Mexico City, Guadalajara, and Monterrey. The mobility in Mexico is still in its infancy compared to the mobility in China.

Additionally, Didi has expanded restaurant delivery service from convenience stores and pharmacies to encourage people to stay at home during the COVID-19 epidemic.

87% of restaurants in the Didi app are small and medium-sized enterprises. Sales of these partner restaurants have risen 45% since the lockdown began. So far, restaurant enrollments have increased to 75% per week, while delivery partner enrollments have increased to 250% per week.

Source: kr-asia.com – Didi wants to challenge Uber by bringing Didi Food delivery service to Mexico City

The challenges that Meituan and Didi are facing

Didi and Meituan are definitely the giants of mobility in China. However, there are still big challenges as they try to overlap the ride-hailing business and food delivery business in China.

As an instrumental APP, the simple platform of Didi is far from being a life-oriented aggregation platform, as it focuses primarily on ride-hailing. At present, users have not yet cultivated the habit of ordering food from Didi, since users are used to the aggregation platform like Meituan or Ele.me (an online food delivery service).

Different from the ride-hailing business in China, which basically needs only online operation and maintenance, Didi needs a large offline business develop team to expand its food takeaway market.

Also, it’s not easy for Meituan. The transportation bureau intervened and warned Meituan against disturbing social order by starting price wars on the day Meituan launched in Shanghai. They announced that all registered cars and drivers of Meituan ride-hailing business in China must obtain the relevant business license for online ride-hailing in Shanghai and the relevant data need be connected to the regulatory platform.

In addition, the Shanghai Municipal Commission of Communications, Municipal Public Security Bureau, Market Price Bureau also warned Meituan that they shall not disrupt the normal market order for the purpose of crowding out competitors or monopolizing the market by operating at a price lower than the cost. Meituan’s should change its advertising slogans such as “starting with one yuan”.

Wang Gang, CEO of Didi analyzed that the competition between Meituan and Didi is not just about ride-hailing business and food delivery business, but “a battle for access to secondary traffic”. Whether Meituan is involved in ride-hailing service in China or Didi is involved in food delivery service in China, both parties can take good use of their users’ consumption scenarios as the basis and form a data circulation system about their users’ consumption preferences for ‘basic necessities of life’. If successful, it will greatly enhance the development of mobility in China.

Author: Qing Zheng

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This article Mobility in China: Opportunities and challenges of when ride-hailing meets delivery is the first one to appear on Daxue Consulting - Market Research China.

China’s mattress market overview

The consumption of mattresses in China is relatively low compared to other countries. The brand concentration is also low, with international brands taking the premium spot and domestic brands taking most the market.

China’s mattress market is the largest in the world

Data Source: Qianzhan, total Consumption of mattresses in China from 2013 to 2018

With the consumption increasing fourteen-fold since 2002, the mattress market in China is now gradually entering a mature stage. With the CAGR of 17.77% for the last decade, China’s mattress market surpassed that of the United States in 2015, becoming the largest in the world.  

International mattress brands are premium players in China

Data Source: Qianzhan, Competitor Overview of the Chinese mattress market

In the Chinese market, consumers generally perceive the imported mattress as premium. Thus, the high-class competitors are represented by international brands. The leading competitors in the Chinese market are the middle-class competitors, which are the domestic brands. The low-class competitors consist of generic brands from local mattress manufacturers.

Data Source: Chyxx, Import of spring mattresses, bedding and similar supplies in 2017

The Chinese mattress industry  focuses on export instead, the trade surplus between the import and export of mattress reached 1.7 billion dollar in 2019. When it comes to imports,  China imported the most bed supplies from Thailand.

Data Source: Qianzhan, Market share of the mattress industry by brand in 2018

The market concentration is low in this market and there is no obvious leading brand. Based on China’s mattress market share in 2018, half of the top twelve brands, including the top four brands are domestic brands. Foreign brands that are outstanding in the market are from the United States, accounting for five out of the top twelve brands.

What do Chinese consumers look for in a mattress?

China’s economic development head lead consumers to reflect on the quality of regular household items, which is known as the consumption upgrade. Growing awareness on the improvement of living standards has prompted people to have specific requirements for their sleeping environment, mattress quality and appearance. The emergence of mattress production technology can meet the needs of a variety of people. To succeed in this market, it is crucial to understand Chinese consumers’ preferences, spot their needs and provide value adds-on service to win the consumers.

Key factors on mattress purchase decision

Data Source: Wenjuntech, Key factors that matter to consumers on purchasing mattresses

While purchasing mattresses, consumers mainly focus on the material and sustainability. In China, sustainability is not only an environmental issue, but there is a perception that it has less pollutants. After price, brand name and after sales service, comfort and softness are less important to Chinese consumers.

Data Source: Wenjuntech, Key factors that prevent consumers from purchasing mattresses

About 80% of the respondents stated that the negative review on the mattress brand would affect their purchase decision. This is what brands need to watch out for when it comes to Chinese negative reviews: 40% of the respondents identified ‘air impermeability’ as the main problem, which would lead to skin disease. ‘Low-quality spring’ and ‘formaldehyde’ are the following problem identified by the respondents, accounting 41% of the total responses.

After sales services are important to many Chinese mattress consumers

Data Source: Wenjuntech, Consumers’ favorable additional services on purchasing mattresses

Data Source: Wenjuntech, Consumers’ perception on cleaning mattresses

Products and services are indivisible. Home delivery, free installation, free return, free cleaning and removing mites are about equally distributed as preferred as additional services. Digging deeper, more than a half consumers value regular mite removal. However, the process is too complicated to consumers to do it by themselves. Regular cleaning services would be a powerful selling point in China’s mattress market.

Common mattress materials in China

Latex mattresses are the top selling mattress in China. Consumers appreciate that are porous and have high elasticity, they are highly sought after because of their ability to conform to the curves of the human body and improve sleep quality. In the first half of 2020, latex mattresses made 1.3 billion RMB in sales on Tmall and Taobao.

Palm mattresses are also very popular in China, making over .5 billion RMB in sales on Tmall and Taobao during the same time period. Palm fiber is woven with good flexibility and moderate hardness, but natural materials may have worms or mildew.

Spring mattresses also made around .5 billion RMB in Tmall and Taobao sales during the first half of 2020. However, negative reviews of spring mattresses suggest brands need to watch out for having springs collapse.

Future growth depends on how often consumers replace mattresses

Changing in consumer perception

The results of a study by Kingston University in England showed that a mattress have an average of at least 15,000 bed mites and dust mites. The number of bacteria on a double-bed mattress that has not been cleaned in three years could exceed 1 billion. And experts suggest changing mattresses every five years. It is the frequency of changing the mattress which will lift the market from maturing to mature. As of 2020, a majority of Chinese mattress consumers do not change their mattress as much as recommended as a research shows that 50% of Chinese consumers only change the mattress when it is broken. It is much lower than that of the United States. In the United States, 50% of consumers stated that they generally change mattress once three years and 30% of consumers stated that they won’t use the mattress for more than three years.

The China’s mattress market is dynamic as changes in consumer perception are constantly evolving. With the increasing awareness on living standard and sleeping quality, the frequency of mattress replacement is speeding up and will be a driver of market growth once market penetration is at the max.

Functional mattress: mattresses matter for high quality sleep

In light to the research in 2018, only 25% of post-90s Chinese have acceptable sleeping quality, above 75% respondents stated that they had poor sleeping quality. Around 20% of the respondents chose to change mattresses to improve the quality of sleep, and 27% of them showed interest in intelligent mattresses.

Following that, post-90s consumers are the main consumers in the mattress market in China, the concept of upgrading sleep quality is expected to trend and prompt the sales of mattress supplies. Functional mattresses working on improving sleeping quality would be able to catch this market opportunity.

Rental housing renovation trends

With the increase in home ownership costs and government policy support, the rental industry has entered a new era of development. Data show that the rental population in Chinese service rental market has maintained steady growth since 2017, with 210 million people in 2018, and 220 million people in 2019, 220 million in 2020, and 240 million in 2022.

Renovation of rental housing is trending in China, as demonstrated by frequent hot discussions on Weibo. Mattresses are seen as a key component of improving the living quality. Therefore, purchasing new mattresses for the rental houses is spurring. When a question raised in Zhihu about whether it is necessary to buy a new mattress for apartment rentals, the top answer stated that people should not settle for uncomfortable mattress and get a new mattress for quality sleep and quality life.

Data Source: Weibo: hot topics related to rental house renovation; Zhihu: Is it necessary to purchase a new mattress for the rental house?

Learning points

As the size of mattresses market is growing in China, and the trend for premiumization is beginning with after sale-services and sustainable material. The market is lacking an obvious leading brand, hence there is potential for an existing brand, or even a market entrant, to step up. Companies need to pay attention to the consumers’ needs and find the way to understand and satisfy them.

Author: Dongni He

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This article China’s mattress market: springing up with new demand is the first one to appear on Daxue Consulting - Market Research China.

Suspicions of fraud had already been hanging around for several months after the investment firm Muddy Waters released a report based on 11,260 hours of store traffic video. The report highlights Luckin coffee’s fraud by cross-checking actual orders and customers, and the company’s bottom line.

Source: Luckin Coffee stock price, Luckin’s stock plummeted from $50 to $3.82

As a result, Luckin Coffee stock price plummeted from USD 50 to less than USD 2 in a matter of months. But does this may not mean the end of Luckin. With such a low stock price and a high tech eco-system, there is a possibility to extend the rein of Luckin. Hence, we speculate who could buy the company that once was capturing Starbuck’s share on the coffee market in China?

The fantastic story of an internet company selling coffee

Luckin Coffee is an internet company. Coffee is the product sold by this company which operates more like other Chinese tech startups than a coffee shop. Indeed, Luckin Coffee digitalized and standardized the operation of an offline retail business.

Concretely, Luckin coffee users order through an application and pickup in store, a vast contrast from the large, cushy relaxation areas of its competitor Starbucks. Luckin coffee’s business model is based on new retail in China. This means that the online shopping experience of buying a coffee is supplemented by offline actions of going into a store and being served by a real employee.

Source: Luckin app, Forbes, Luckin Coffee’s business model embodies new retail in China through on app orders needed to be offline picked up

What else defines Luckin coffee as an internet company is the classic cash-burning process to quickly acquire users and scale-up. This method enabled Luckin Coffee to raise the right amount of money to promptly establish thousands of stores across China before going public by a USD 640 million IPO in May 2019 on the Nasdaq. Another interesting finding is that the company’s IPO documents insist on Luckin Coffee’s new retail business model, rather than on its F&B products.

Following the IPO, the company quickly raised USD 1.1 billion in January 2020. The same month, the company made the headlines by becoming the first coffee chain in China. Thanks to its highly praised business model, the company now exceeds the number of Starbucks stores, with more than 6,500 locations.

But the story was too good to be true. Right after the IPO, the company is reported having fabricated financial and operating numbers.

Luckin Coffee’s fraud highlights a fundamentally broken business

On January 31, 2020, short-seller Muddy Waters published an 89-pages anonymous report, claiming that the company had falsified financial and operational figures. Not only claiming that, the report says Luckin Coffee “was a fundamentally broken business that was attempting to instill the culture of drinking coffee into Chinese consumers.”

The report says the number of items sold per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q. According to the writers, they employed 92 full-time and 1,418 part-time staff to record traffic in 620 Luckin Coffee stores. The data accumulation is impressive, with the collection of thousands of receipts, as displayed below.

Source: Muddy Waters’ anonymous report

Faking in-store order numbers

According to the investigation document, Luckin coffee’s fraud would likely have started occurring around November 23, 2019, when the company started to inflate its own app online order volume.

As all orders are placed online and retrieved from the store, a sequential order number appears on the receipt (such as when ordering at McDonald’s). Therefore, paying attention to these numbers could give a clear idea of how many orders have been placed per day for a specific store.

However, this method cannot be used if Luckin intentionally jumps and skips numbers during the day to purposely distort the tracking results. This is exactly what happened, as evidenced by this screenshot in the report.

Source: Muddy Waters’ anonymous report, Wechat screenshot evidences the inflation of Luckin Coffee’s order volume as one of the methods to manipulate operation figures

Shortly after the revelations of the report, Luckin published a press release to deny the allegations. The company evoked the strength of its business model, combined with the booming coffee market in China: “Luckin Coffee firmly stands by its business model and is confident in benefiting from the strong growth of China’s coffee market in the future.”

The fact that Luckin Coffee’s stock price didn’t drop after the publication of the report, until Luckin’s own internal audit, shows strong trust from the investors in the company’s business model.

But was the magic business model of Luckin Coffee enough to prove that the business could ever reach profitability?

Were Chinese people even ready to drink more coffee?

Data from the International Coffee Organization (ICO) show that the coffee market in China experienced strong growth between 2007 and 2015. But for the past few years, growth has stalled, especially since the players which target the core functional coffee demand are well established and more numerous (Starbucks, Costa Coffee, McCafé).

Source: International Coffee Organization (ICO) 2018, Unroasted coffee beans consumption in China

Coffee consumption is driven by culture rather than economic development

Increasing disposable income does not mean that their small consumption of coffee will explode overnight. Obviously, the coffee market in China was a boon for those who managed to capture the emerging demand in the 2010s (Hello Starbucks). In fact, the global coffee consumption comparison across countries indicates that coffee consumption per capita level is primarily driven by culture rather than economic development.

Indeed, China’s coffee bean consumption per capita is not only significantly behind developed countries such as Japan but also way lower than developing countries such as Vietnam.

More Westernized developing countries such as Vietnam (a former colony of France) and the Philippines (a former colony of Spain and the US) have high coffee consumptions. By contrast, in countries with strong tea cultures, such as China, India, and Sri Lanka, coffee consumptions are low.

Therefore, it’s no wonder that Luckin Coffee burned billions of investors’ dollars without meeting the expected success.

Source: International Coffee Organization (ICO) 2018, Per-capita Coffee cups consumed across Asia

Time for a Business turnaround in China

Even if Chinese people only consume 7 coffee cups per year, they do like coffee. Luckin coffee’s scandal does not contradict this. Rather, it highlights the fact that burning billions won’t make people drink coffee even faster. However, if Chinese people won’t drink more coffee, they will drink more tea.

While the number of tea stores demonstrated a continuous growth trend, the number of freshly brewed coffee stores declined from 121,000 stores in 2016 to 105,000 stores in 2018. Hence, the coffee supply network coverage is not the issue. There is just not enough demand yet.

Data source: Meituan, 2019 Chinese Beverage Industry’s Development Trend Report, The growing number of tea stores highlight the strong growth of the tea market in China

Following these observations, Luckin Coffee did try a business turnaround by starting a new type of product called Luckin Tea in May 2019. But business turnaround in China requires more than starting a new range of products.

Daxue Consulting’s China business turnaround expertise

In order to help a client build its business turnaround in China, Daxue Consulting developed a four-step plan, beginning with an audit of the situation. It consists of identifying where the brand had potential improvement and re-orientation needs. It includes distribution screening (data-collection through Store-Checks in China), brand image, and positioning in its competitive frame (through Benchmark). The following steps include consumer research, marketing activation portfolio, and monitoring plan.

It turns out this article briefly tackles step 1 of daxue’s business turnaround consulting service in China. We identified where Luckin has potential improvement – in tea – but we still need to assess its tea competitive frame.

Could Luckin Coffee’s future be with tea products?

Tea is an entirely different market from coffee. Nowadays, the tea market in China is made up of ‘new style tea 新式茶饮’ which is made of fresh tea leaves and concentrated liquid, such as milk or cream. It also includes topping like jellies, tapioca pearls, and fruit. Hence, while demand is not the limiting factor for the tea market in China, the main challenges lie in supply chain management and in-store production.

Source: Daxue Consulting report, The Tea Market in China

Could Luckin Coffee’s future be with Luckin Tea?

Part of a more aggressive turnaround strategy, Luckin Tea was separated from Luckin Coffee as an independently operated brand in September 2019. However, Luckin Tea in-store production and supply chain management is designed for Coffee products, which are fundamentally different from the new-style tea products.

In a China Paradigm podcast interview, Martin Papp, co-founder of PAPP’S TEA told Daxue Consulting young Chinese are going to Starbucks because they can’t find a tea location that fits their lifestyle. They want a more modern, fashionable, and cool tea brand. And while Luckin Coffee and its spin-off brand Luckin Tea are focusing on digital and financial engineering, HEYTEA appears to be focusing on thrilling their customers via its product development.

This new-style tea brand has lines out of doors in China and proven demand for their fresh flavored elaborated teas. While Luckin Tea products are basically made of blended NFC juice, frozen fruits, and artificial pigment, HEYTEA’s products have an uneven texture with distinct layers of tea, fruits, and hand-made cheese milk topping.

Source: Luckin Coffee, HEYTEA, could Luckin Coffee’s future be with Luckin Tea?

HEYTEA also has extensive capabilities in continually refreshing the menu with new product introduction. It is something quite far from Luckin Tea, whose in-store standardization process leaves little room for product customization.

Could Luckin Coffee’s future be with HEYTEA?

Let’s summarize. Luckin Coffee grew up like a tech company using investors’ money to open more than 6,000 outlets – more than Starbucks – without ever reaching profitability.  The company has been accused of faking its financial and operational figures, which turned out to be true. As a result, Luckin Coffee’s stock price plunged and will soon be delisted from the NASDAQ stock exchange. In a last attempt, Luckin Coffee created Luckin Tea, which turns out to be no more than a desperate move to capture new-style tea lovers with a tea that cannot fall in this category of products.  

On the other hand, HEYTEA is thrilling Chinese customers. The brand is growing based on its traffic, not investor capital, just like Starbucks did in China. The brand has 400 stores, regularly taken by storm by tea lovers. In fact, HEYTEA is Starbucks’ most interesting competitor now. Simply because we saw that it has a tailwind that neither Starbucks nor Luckin Coffee has – a significant, proven and enthusiastic demand.

Should HEYTEA buy Luckin Coffee?

Moreover, HEYTEA is recently moving into coffee. They quickly adopted a Chinese new-retail business model as Luckin did, merging pickup stores and their ordering app called “HEYTEA GO.” The brand is now growing on Luckin Coffe’s field, which previously tried to grow on HEYTEA’s one. The strong difference between the two is that HEYTEA succeeded in its ‘home’ market while Luckin Coffee is slowly dying on its.

Source: EqualOcean, HEYTEA GO pickup stores, could Luckin Coffe’s future be with HEYTEA?

Then the question comes naturally: Should HEYTEA buy Luckin Coffee?

HEYTEA is already doing great at creating popular products that thrill Chinese consumers. But unlike Starbucks, it still doesn’t have a quality footprint of good locations across China. Therefore, according to Jeff Towson, “The next logical move is for HEYTEA is to find a partner to scale up on the real estate aspects.”

Could the tea brand buy Luckin? It could. It could get HEYTEA +6,000 locations in a snap. However, according to Mike Vinkenborg, project leader at Daxue Consulting: “Part of HEYTEA’s mystery is their lines. If the brand becomes too mass, it may lose its level of mystery.”

Still, we could easily imagine HEYTEA buying Luckin Coffee. The new-style tea brand could use it as a strong asset to develop its coffee branch by only selecting a few thousand premium quality Luckin Coffee stores to further threaten its biggest rival, Starbucks.

If Luckin Coffee’s future is uncertain, HEYTEA could be interested in buying the broken business. If not, possibilities are endless for other hot drink businesses to take over the brand. And if not again, let’s see if Luckin Coffee’s business turnaround in China can strengthen its capabilities to turn off rumors of bankruptcy.

Author: Maxime Bennehard

Curious to learn more about China’s tea market?

Check out our official report on the tea market in China!

See our China paradigms episode with a tea entrepreneur

This article Business turnaround in China: What is the future for Luckin Coffee? is the first one to appear on Daxue Consulting - Market Research China.

World Health Organization described China’s response to COVID-19 outbreak as the “most ambitious, agile and aggressive disease containment effort in history”. China’s early isolation and the resulting drop in contact between people helped to reduce cases. The government is not the only body to take swift actions, businesses, schools and individuals also played important roles in preventing the spread of COVID-19. Hence, the learning points are widely applicable. That is why Daxue Consulting examined 50 measures of how China suppresses COVID-19.

NO AND LOW CONTACT

1. SEPARATING STUDENTS IN DINING HALLS

In schools, students had plastic dividers during school meals to prevent cross infection. Some schools divided students lunch periods so fewer students eat at a time.

2. ENFORCED SOCIAL DISTANCE IN SCHOOL

Some primary schools used a creative way to enforce social distancing between students. They had students wear ‘distance hats’ to maintain a distance of one meter from one another.

3. MASKS IN PUBLIC TRANSPORTATION

During the epidemic, the National Health Commission required people to wear masks on public transportation. In addition, the National Health Commission suggested people disinfect their hands after using public transportation.

4. MASKS ARE REQUIRED IN SHOPPING CENTERS

All the employees in shops must wear masks when they are on duty. Guards check consumers’ masks and health code at the door.

5. MASKS ARE REQUIRED BY RESTAURANTS

People without masks cannot enter most restaurants during the epidemic. This measure helped Chinese people to form the habit of wearing masks every day.

6. RESTAURANTS PROVIDE ENVELOPES TO PUT MASKS IN

To prevent masks from getting contaminated on restaurant tables, many restaurants provide envelopes for customers to set their masks down.

7. LIMITED NUMBER OF PEOPLE ALLOWED ON ELEVATORS

It is easy to spread COVID-19 in elevators. Hence, many Chinese office buildings limited the number of people in elevators at one time. Also, plastic is used to cover elevator buttons and the plastic is changed every day. Some office buildings even provide toothpicks or tissue for people to press elevator buttons.

8. BANKS OFFER DISPOSABLE TISSUES TO TOUCH DOOR HANDLES OF ATM

During the epidemic, many banks offered tissues outside each ATM’s door for clients to use when touching door handles.

9. DIDI’S TAXIS PROTECT PASSENGERS BY INSTALLING PLASTIC FILM

From early February, Didi installed protective plastic film in the back of taxis to protect both drivers and passengers. Simultaneously, both passengers and drivers need to wear masks in the car.

10. DELIVERY PEOPLE NOT ALLOWED IN RESIDENTIAL BUILDINGS

According to the policy of local governments, residential areas have a designated area for temporary package storage. Customers shall pick them up by themselves. Contactless delivery reduces the risk of contagion.

11. ONE METER DISTANCE BETWEEN PEOPLE IS REQUIRED WHEN STANDING IN LINE

In correspondence with local government’s regulations during COVID-19, shoppers need to keep 1-2 meters distance from each other when standing in line. To nudge consumers into standing at least one meter apart, stores labeled standing spots.

12. OFFICES ALLOW FLEXIBLE WORK SCHEDULES

Many Chinese companies allowed flexible work plans during COVID-19.  When the situation was serious, only a few employees worked at their offices. Besides, during the epidemic, many companies required employees to work remotely in China. As the situation improved, more employees could work from offices.

Source: Daxue consulting and Dragonfly Group, Impact of the COVID-19 epidemic on the organization and HR within French and French-speaking companies established in China

13. NO SHAKING HANDS IN BUSINESS SETTINGS

To abide by the recommendation to stay 1 to 2 meters from each other, the member of CPPCC National Committee, Yang Zhaoming, advocated that people should use the Chinese traditional greeting way to pat each other on the back or bow instead of shaking hands.

Source: Oriental Daily, How China suppresses COVID-19 report by daxue consulting. Members of the CPPCC National Committee greet each other.

14. THE CENTRAL BANK ENCOURAGED NO CASH PAYMENT

Cash can spread the virus easily. Thus, the People’s Bank of China advised people to use more non-cash methods, especially mobile payments.

15. IMPLEMENTING LOW-CONTACT MEASURES IN RESTAURAUNTS

Another way of how China suppresses COVID-19, was shortening the opening time of restaurants to reduce the crowded traffic. Some restaurants in China offer public chopsticks and spoons to use on shared dishes.

MASS DISINFECTION

16. DISINFECTING PUBLIC TRANSPORTATION

In terms of public transport, the way of how China suppresses COVID-19 included disinfection of public transportation vehicles once a day after operation. Besides, in buses and subway, commonly touched hard surfaces also were disinfected.

17. DISINFECTING COMMERCIAL STORES

In retail industry in China, the disinfection of commercial stores, focusing on the surface of tables, door handles, ground, and walls was obligatory.

18. DISINFECTING COMMUNITIES BY COMMUNITY STAFF

Following the guideline released by Beijing Center for Diseases Prevention and Control (疫情防控中心), commonly touched objects such as stair railings and door handles should be disinfected by chlorine concentration of 250-500mg/L or 75% ethanol once a day.

19. DISINFECTING IN SCHOOLS

The National Health Commission and the local Municipal Health Commission required teachers and staff to disinfect schools.

Source: Sina news, How China suppresses COVID-19 report by daxue consulting. Schools in Miyun thoroughly disinfected every classroom

20. HAND SANITIZER AVAILABLE IN PUBLIC PLACES

People can disinfect their hands in some public places with free sanitizer.

21. SANITIZING PHONES IS ADVOCATED

As people use mobile phones every day, it is easy for the virus to adhere to the surface. Medical experts suggested people to disinfect phones 2-3 times a day by disinfectant wipes.

22. CARRYING DISINFECTING WIPES IS RECOMMENDED

Chinese medical experts suggested carrying some disinfecting wipes every day so that they could sanitize their hands at any time

EDUCATE, TEACH, AND ENCOURAGE

23. PUBLIC ANNOUCEMENTS TO ADVOCATE SELF-PROTECTION

It is quite common in China to see the posters in streets to advocate mask wearing and hand washing. The purpose of the measure is to generate a strong awareness of self-protection.

24. POSTERS WITH HAND WASHING INSTRUCTIONS

In many public places, there are posters released by the local Municipal Health Commission to show hand washing instructions to teach the scientific way of washing hands.

25. PROPAGANDA ON HOW TO DISPOSE OF USED MASKS

People have the awareness of wearing masks which is an effective way of self-protection, as well as protecting others. However, how to deal with the waste masks is also a major issue. If used masks are not disinfected before being discarded, it could contaminate hands again.

26. DISSEMINATE THE KNOWLEDGE OF COVID-19 BASICS AND PREVENTION

Local governments propagandized the prevention measures of coronavirus by street posters that include:

• Introduction of COVID-19
• How the coronavirus spreads and prevention
• COVID-19 symptoms
• What to do if you show symptoms

27. DAILY TEMPERATURE CHECKS FOR PUBLIC TRANSPORTATION STAFF

In terms of public transportation, the way of how China suppresses COVID-19 was measuring of employees’ temperature. Besides, wearing masks and disposable gloves was obligatory. However, the duration of enforcing this measure differs city by city based on the severity of the local outbreak.

28. SCHOOLS RELEASED ONLINE COURSES

During the epidemic, all Chinese schools were closed for 2+ months and students had to stay at home. In order to make sure that course progress would not be disrupted by COVID-19, the Department of Education released a policy which required  schools and universities to launch online courses.

29. OVERSEAS CHINESE DONATED MASKS TO CHINESE HOSPITALS

When the epidemic was arising in China, the amount of masks available was inadequate. International students donated money and masks to China.

30. CHINESE EMBASSY ARRANGED AIR LINES TO BRING INTERNATIONAL STUDENTS HOME

Due to the coronavirus outbreak overseas, many flights were cancelled. This led to a large quantity of Chinese travelers stuck in foreign countries. Thus, the Chinese embassy arranged flights to bring them home.

31. AUTOMATIC VISA EXTENSION FOR FOREIGNERS

The Chinese government took foreigners in China into account as well. As traveling became unsafe during the pandemic, the Chinese government automatically extended all visas for two months if they expired.

POPULATION CONTROL

32. PEOPLE WHO REJECTED EPIDEMIC PREVENTION MEASURES WOULD BE PROSECUTED FOR LEGAL LIABILITIES

People who have been in an epidemic region/city or closely contacted people with suspected/diagnosed cases had to accept temperature tests and centralized or home-quarantine for 14 days. If someone refused to give their information or accept body temperature tests, it would count as a crime of endangering public safety.

33. LOCAL GOVERNEMNET LAUNCHED HEALTH CODES

Citizens could generate the personal health code through mobile apps in China, WeChat public account and QR code. The health code served as an electronic voucher for individuals to enter or leave cities. There are 3 types of them:

1. Red: Need to be quarantined for 14 days
2. Yellow: Need to be quarantined for 8 days
3. Green: No need quarantine and free to enter any public places.

34. RESTAURANTS AND ONLINE FOOD DELIVERY PLATFORMS SHOW THE BODY TEMPERATURE OF STAFF

Restaurants and online food delivery platforms in China launched many measures to ensure the food safety.

Temperature tests for delivery people and restaurant employees twice a day, disinfection of delivery boxes, wearing masks at work and contactless delivery service were very important during the epidemic. These measures had a great contribution to how China suppresses COVID-19.

35. MEASURES IN RESTAURANTS, BARS, NIGHTCLUBS REQUIRED BY LOCAL GOVERNMENT

The main measures of how China suppresses COVID-19 in public places were: limiting the number of tables and diners, reducing the placement of tables and chairs, and increasing the distance between tables. Testing the body temperature of every consumer was also obligatory.

36. BODY TEMPERATURE CHECK AND PASSES ARE REQUIRED BY OFFICE BUILDINGS

Guards check body temperatures at the entrance of office buildings in China. Delivered goods are in designated places at the entrance under the unified management and control. The air conditioning system in office buildings was turned off during the epidemic. All employees working in office buildings need to apply for passes, people from outside need to register personal information at the entrance.

37. LIMITATING THE NUMBER OF TOURISTS

Online booking tickets helped to control the number of tourists in China in certain time period. The number of tourists in every scenic spot could not exceed 30% of its largest capacity. Tour groups cannot have more than 30 people. Indoor tourist sites were all closed.

38. BAIDU LAUNCHED CORONAVIRUS INFECTION MAPS

Chinese search engine, Baidu launched the “fight against pneumonia” map to let users know the latest and accurate information in real time. People can have a better understanding of the of the epidemic situation in each city by using the map

39. MEASURES TO MANAGE ACCESS/EXIT OF COMMUNITIES

When people come from other provinces or countries, they have to register travel info in their communities. Before entering a community, guards measure the temperature of every individual according the regulation of local governments. Some communities required residents to apply for pass codes on WeChat mini program.

40. CHECKING BODY TEMPERATURE BEFORE ENTERING STORES

According to local government’s policy, testing body temperature before entering stores is important to protect customers and employees’ safety.

41. MEASURING PASSENGERS’ TEMPERATURE BY THERMAL CAMERAS IN TRANSPORTATION STATIONS

Transportation stations, including subways, railways, and airports, have infrared thermometers. The system automatically detects the temperature of passengers when they pass security checkpoints.

42. MINI PROGRAM TO TRACK PEOPLE’S TRAVEL HISTORY

The China Academy of Information and Communications Technology (CAICT) launched a mini program to track everyone’s travel history in past 14 days to see if they have been places seriously affected by COVID-19.

43. REGISTERING ON A “HEALTH CLOUD SYSTEM” BY QR CODE TO ENTER SHANGHAI

Passengers who entered Shanghai shall apply for on-line health registration on the “health cloud” system.

44. QR CODES TRACK PEOPLE’S POTENTIAL CONTACT WITH THE CORONAVIRUS

After scanning the QR code, passengers would know if they had close contact with suspected cases. They get the information by text messages to self-quarantine at home if they had.

QUARANTINE MEASURES

45. ARRANGING CENTRALIZED QUARANTINE IN HOTELS FOR PEOPLE FROM FOREIGN AND DOMESTIC EPIDEMIC REGIONS

According to the Chinese government’s policy, people coming from domestic epidemic areas and all overseas areas should stay under the quarantine in hotels for 14 days. Doctors record their body temperature twice a day during quarantine. On the thirteenth day, they need to take a virus test. If their test results are negative, they can return home.

46. IMPLEMENTING HOME-QUARANTINE FOR PEOPLE FROM HIGH-RISK REGIONS

People from overseas and domestic high-risk regions should stay under the quarantine for 14 days at home.

 Groups which meet the requirement of self-quarantine at home:

1. Over 70 years old
2. Children
3. Pregnant women
4. Living alone

Doctors and police measure their body temperature twice a day. Also, there are door trackers on their doors. If doors open over 1 cm during the home-quarantine period, the police will be notified.

Source: Laiyuan, How China suppresses COVID-19 report by daxue consulting.

47. LOCAL GOVERNMENT GIVES OUT GUIDELINES IN DIFFERENT LANGUAGES

China’s local governments gave out guidelines in different languages, so every foreigner in China understood what rules they should follow. Besides, the National Immigration Administration of the PRC gave out Chinese-English bilingual handouts of Laws observed by foreigners in China.

48. DISINFECTING THE TRASH OF QUARANTINED PEOPLE

Every community set up a temporary garbage collection point to place garbage generated by quarantined people. The local Landscaping & City Appearance Administrative Bureau sent staff to disinfect the garbage before delivering it to incineration plants.

49. MASS TESTING

In June 2020 China has completed a mass testing programme in Wuhan. Authorities in Wuhan have found more than 200 asymptomatic cases of the new coronavirus. Testing helps to find asymptomatic cases and people with an early stage of decease and put them under the quarantine.  

50. FINES FOR PEOPLE WHO DO NOT COVER THEIR NOSE AND MOUTH

Even though people must wear masks, many do it in a wrong way. Since April 2020 anyone who doesn’t cover their nose and mouth when coughing or sneezing will be fined.

KEY TAKEAWAYS

Digital technology was integral to containing COVID-19

Chinese government effectively identified cases and controlled the population by using Location Based Services (LBS) and big data technology. Also, big data platforms release real-time data about COVID-19, which is helpful to ease the public panic. At last, those technologies will continuously contribute to China’s public administration in the future.

The government & businesses educated the public on hygiene and social distancing tactics

Chinese local governments widely used signs to guide people to follow regulations during the epidemic. This nudged people on public transportation and in shops to keep a distance of 1-2 meters from one another.

Acting early was the key to contain COVID-19

Once COVID-19 was recognized as contagious, China took immediate measures to reduce population flow, such as the lockdown of Wuhan in January. Many cities and provinces took emergency control measures before discovering any COVID-19 cases. Those measures limited the spread of COVID-19 and gained time for follow-up actions. In addition, China’s capable of rapid response is important to managing public crisis.

Many COVID-19 prevention measures were decided on the city or province level

Chinese local governments took steps according to the different situation of provinces and cities. Also, the duration and enforcement are not uniform in different regions and communities. The advantage is that local governments can respond to the epidemic quickly according to the specific circumstances of each region. The downside is that China lacks a unified plan and supervision, which lead to the inefficiency of some measures.

See our report on how China suppresses COVID-19

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This article 50 measures China uses to suppress the spread of COVID-19 is the first one to appear on Daxue Consulting - Market Research China.

Cloud computing is the storage and processing of data on remote data centers. Cloud storage reduces the burden on computers which makes possible more work flexibility. A large tech savvy population and need for data security drive the development of cloud computing in China.

China has the largest online population in the world, with over 800 million internet users. Therefore it is no surprise that China generates an enormous amount of data that must be stored securely. Cloud-based servers are more scalable, affordable, and secure than on-site servers, so they perfectly satisfy China’s huge demand for flexible data storage.

The technology is being rapidly developed in various sectors and is already generating over five billion dollars in revenue annually. Generally the three main types of business delivery models available for cloud computing are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Meanwhile, data can be stored from the public cloud, private cloud and hybrid cloud.

Sizing the Chinese cloud computing market

In 2018, the Chinese cloud computing market was second in terms of overall size. It accrued approximately $13.4 billion dollars in annual revenue compared to $53.4 billion of the US. Despite this, the Chinese government is dedicated to pushing the market to approximately $64 billion by 2020, creating major business opportunities for cloud computing providers. At any rate, China’s cloud computing industry is projected to exceed 300 billion yuan ($42.3 billion dollars) by 2023, by which time an estimated 60% of domestic companies and government agencies will be using cloud computing services.

[Source(s): Statista, IDC, China’s cloud computing market size]

According to the Chinese Ministry of Industry and Information Technology (MIIT), from 2015 to 2019 officials have been working to more than double the scale of China’s cloud computing industry. Many analysts predict that public cloud usage rates could grow more than 20% annually to 2023.

Large enterprises, government agencies and financial institutions accelerate the pace of cloud application

Furthermore, according to an interpretation of the MIIT’s Action Plan, China’s cloud computing industrial structure continues to optimize. Key technologies such as large-scale concurrent processing, mass data storage and data center energy-saving have achieved great breakthroughs in standards. Also, backbone enterprises are working to develop more strategies to improve their business categories. With many large bodies like enterprises and government institutions relying on cloud computing in China, the technology is applied into an increasingly wide range of industries.

According to data from market research firm IDC, cloud computing and artificial intelligence will more than double the rates of innovation and productivity at Chinese companies and organizations by 2021. For these reasons, cloud computing is considered a crucial infrastructural force in China’s push for an industrial upgrade as it moves to embrace new technologies like artificial intelligence, internet of things, and big data.

The graph below portrays IaaS as the segment with the biggest market share in cloud computing in China. The forecasted market size of software-as-a-service (SaaS) will continue to be the largest among the three with CRM and Mail management as the most widely used application types.

[Source: Statista, Cloud Computing in China – Statistics & Facts]

Chinese Government’s Cloud Computing Industry Development Mandate

As part of a larger development strategy for advancing Chinese software and information technology services, the Chinese government plans to continue to make large investments over the next few years to drive domestic cloud computing development.

Through the ‘Internet Plus’ strategy, introduced in 2015, the Chinese government is pushing for the development of the domestic cloud computing industry to modernize manufacturing and other domestic industries. In short, this strategy promotes the integration of cloud computing with big data and IoT.

China’s cloud computing market is still at the nascent stage; however, it is likely to witness tremendous growth across all the industry verticals with public sector, manufacturing, retail, and healthcare sectors among major adopters of cloud computing services. Also, fast pace deployment of 4G LTE mobile network across China is anticipated to support further penetration of cloud computing services among end user organizations. The cloud market has particularly strong growth potential, underpinned by government initiatives and major investment by vendors in infrastructure and human capital. A new cybersecurity law will protect local cloud and hosting players from growing international competition.

Government support for the Chinese cloud computing market will see strong growth continue. Domestic firms have been set the target by China’s Ministry of Industry and Information Technology’s goal of increasing cloud revenues by at least 50% annually over the next few years, including a focus on generating revenues for cloud services from international sources and building China’s presence in the global cloud computing market. There is also an eight-point initiative that includes the creation of a national industry data recovery center and a national safety control service center for China’s data security.

Trends in the Cloud Computing Space

The future of cloud computing looks vast, connected and increasingly fast. While the concept and initial design of cloud computing began in the United States as a way to store data, networks, intelligence and more over the Internet, the refinement of cloud-based platforms and services are spreading widely in China. From individual consumer cloud services for storing photos, to multibillion-dollar corporations that need to house intelligent data, this technology has become internationally ubiquitous in the last ten years.

Globally, the cloud computing industry is dominated by American companies such as Amazon, Microsoft, and Google, which controlled a combined 57% of the overall market in 2018. According to Wikibon Research, the global cloud market hit $237 billion in 2018 and is estimated to reach $814 billion by 2027. With mega corporations like Google, IBM and Amazon mostly running cloud systems in the U.S., it’s easy to overlook China’s market for now. Data shows, however, that companies like Alibaba (which currently ranks fifth in the global cloud computing market), Tencent and Huawei have worked their way up the ranks and are growing rapidly.

[Source: Statista, Synergy Research Group, Global market share of leading cloud providers]

China’s cloud computing market will be the largest in the world

China’s cloud market is set to become the largest in the world by 2023. But right now, it remains nascent and insubstantial compared with its respective sectors in mature economies. The Chinese market is roughly one-tenth the size of the US equivalent. The market is expanding but remains fragmented, which means that much of it is up for grabs. Domestic tech heavyweights Alibaba and Tencent, along with international players like Amazon and Microsoft, all want a piece of what will eventually become a very large pie.

Despite the challenges presented by the Chinese market, several large, well-resourced U.S. cloud providers have established operations in China through joint partnerships with local companies. For example, Microsoft has partnered with 21Vianet, a Chinese data services firm, to roll out public cloud. Other U.S. companies are also operating in China. Amazon is partnering with ChinaNetCenter to offer cloud services and IBM is teaming with 21Vianet to offer its hybrid cloud platform.

Tense domestic competition drives growth

Furthermore, in the decade since e-commerce giant Alibaba became one of the first domestic players to tap into the market in 2009, China’s internet giants have been pouring resources into building up their cloud infrastructure services. Companies like Huawei, Tencent, and Baidu are now working feverishly to deploy their own cloud computing-based services. Among Chinese tech players, the excitement surrounding cloud computing’s potential as a growth driver is real.

Thus, local competition is another significant factor to take into consideration. Several Chinese companies are well-positioned in their domestic market. E-commerce giant Alibaba’s Aliyun is already a notable competitor, servicing 1.4 million customers directly and indirectly. China Mobile, China Unicom, China Telecom, Baidu, Tencent and ZTE among others, are also well-positioned in the market.

The Chinese cloud computing market is dominated by local players

China’s cloud market is dominated by local players, with IDC figures showing Alibaba Cloud as holding 42% of the public cloud marketplace in 2018, followed by Tencent Cloud at 12%, China Telecom with 9%, and Amazon Web Services (AWS) close behind with 6%. The total market for cloud infrastructure and software in the world’s second-largest economy reached $5.4 billion in the first half of 2019.

As you can see below, they are leading in each of the four key market segments: data center hardware/software, cloud computing services, colocation and CDN.

[Source: Synergy Research Group, This graph shows the market size (greater to the right) and annualized growth rate (high growth will place at the top of the chart) for the Chinese Cloud and Data Center Market]

Where is the growth and opportunities in the Chinese cloud computing market?

China has been a frontrunner in many different tech industry verticals, from AI and the Internet of Things (IoT), to smart cars and virtual reality (VR) services. As a direct result, the Chinese government and businesses have worked to also strengthen cloud computing technologies to support the data infrastructure of many of these emerging technologies.

According to Zhang Feng, chief engineer with China’s Ministry of Industry and Information Technology, China’s overall cloud industry reached a scale of $48 billion, and the IoT industry surpassed $174 billion in 2018. In other words, there are many businesses in many industries looking to implement cutting edge cloud computing technologies. Thus, increased development by Chinese companies on their cloud services offerings will continue to support the domestic market’s growth.

Along with this, the SME market in particular continues to offer strong growth potential and will be an important driver of demand for cloud computing in China. With security being a key hurdle, Chinese SMEs will likely continue to favor Chinese cloud providers for their IT services expansion. The SME cloud market was a key area of growth over the previous years and the fastest growth rates were for hosted communication and collaboration services, but in terms of total demand, it is Infrastructure-as-a-service (IaaS) and business applications that dominated.

Chinese companies are sensitive about their data

In the past, concerns over cost, security and logistics meant many Chinese businesses were reluctant to migrate to the cloud. Chinese companies are extremely sensitive when it comes to their data, with the vast majority still preferring it to be stored in-country.

However, encouraged by decreasing costs and Chinese government policy, a growing number of Chinese firms, unhampered by decades of outdated IT infrastructure, are now adopting cloud-based alternatives to on-site enterprise hardware and software. This is especially the case with China’s burgeoning number of SMEs, which typically have smaller budgets and therefore prefer the lean business models supported by SaaS. Customer relationship management software (CRM), office automation software (OA), intelligent manufacturing software (IM) and office collaboration software top their shopping lists.

Alibaba Cloud Leads China’s Cloud Computing Market

It opened up to third-party customers in 2009 and offers a comprehensive suite of cloud services, including web hosting, elastic computing, data migration, database, storage and content delivery networks, large-scale computing, security, and management and application serves.

Alibaba Cloud is China’s largest public cloud service provider with the most advanced cloud network, including 11 data centers and more than 2,300 CDN nodes in mainland China. Although being the world’s fifth biggest player in having just 5% of the global cloud market, it holds a 40% share of China’s domestic market and provides international companies with seamless access to China through Alibaba Cloud’s

China Gateway solution. Alibaba Cloud’s ongoing focus on innovation and internationalization has allowed it to outperform major Cloud vendors in the Asia Pacific market.

[Source: Deloitte, Overview of Alibaba’s Cloud Products and Solutions]

Alibaba Cloud’s Recent Performance

In its December 2019 4Q earnings, Alibaba maintained its leadership position in the Chinese cloud computing market by developing technology and business solutions that enable the digital transformation of businesses across industries in both the public and private sectors. During the quarter Alibaba Cloud reached two important financial and technological milestones.

62% YOY growth

First, their cloud computing business generated, for the first time, over 10 billion RMB in revenue, growing 62% year-over-year. This was driven by increased revenue in its public cloud and hybrid cloud businesses.

Applying public cloud infrastructure

Second, ahead of last year’s 11.11 Shopping Festival, Alibaba Cloud enabled the migration of the core systems of their e-commerce businesses onto their public cloud. During the festival, Alibaba Cloud provided a highly scalable, reliable and secure public cloud infrastructure that handled a single day GMV of RMB 268.4 billion (US$38.4 billion). Its public cloud infrastructure and technologies enabled Alibaba to process over 544,000 orders per second at peak and 970 petabytes of data without disruption for the full 24 hour period during the festival.

The company believes that the migration of the core systems of Alibaba’s e-commerce businesses onto the public cloud is a major milestone that not only will generate greater operating efficiencies for Alibaba but also will encourage more customers to adopt their public cloud infrastructure.

Cloud computing now represents more than 7% of all of the company’s revenues as Alibaba continues to cement its cloud position in China and in the Asia Pacific region.

A Promising Future for the Chinese Cloud Computing Industry

China still has a complex regulatory environment with intense local competition. However, the market opportunity is attractive to a point where foreign firms are willing to invest heavily in the cloud sector and take necessary measures to be compliant. Massive investments from both public and private actors also support this trend as it enables higher speed connections in remote areas and better wireless connectivity in the whole country.

Huge private sector investment, strong government backing and young talent are together rallying behind the growth of China’s cloud computing industry. The thirst for big data and information on consumer trends from corporate marketing departments will likewise drive demand for cloud-based database technology.

The other primary driving force will be market demand. Given the growing appetite for on-demand video, short-videos and live-streaming, mobile gaming and online content in China, content providers will need to invest in elastic computing services, auto-scaling, content delivery networks and server load balancers in order to provide uninterrupted service and fast download speeds. Demand for cloud products will also increase as companies invest in new technologies such as O2O services, IoT integration and online payments, or expand into overseas markets.

Mobile security will be another priority for the industry. As the world’s largest smartphone market, China is regarded as a mobile-centric market, and different to PC-centric markets found in the West. China’s tech savvy population is leading the way in adopting mobile payments, O2O services, mobile gaming and designing their lives around their smartphone. While Android is the leader in powering mobile applications for the China market, its operating system also remains highly susceptible to external attacks. To address data security and the concerns of Chinese mobile users, foreign companies will need to invest in mobile security, while still offering fast load speed and high availability to users.

Public vs. Private Cloud

[Source: Technode, Mckinsey, Spending on public and private cloud computing in China]

Although Chinese businesses are beginning to ramp up investment in cloud computing, they use cloud computing services at a lower rate than companies in the United States and other developed markets. While Chinese companies generally prefer the private cloud (i.e., data is stored on a company’s intranet), rather than the public cloud (i.e., data is stored by the provider), China’s public cloud market is set to grow over 20% by 2020 as more Chinese companies adopt public cloud services.

For foreign cloud firms, the local ecosystem features several peculiarities that have so far restricted them from securing significant market share on a global level. In addition to standard regulations that prohibit foreign cloud providers, they also face a market unready for widespread public cloud adoption. Unlike more mature cloud markets, firms still prefer private cloud solutions, which allow them to maintain full ownership and control of physical resources. However, the public cloud model is slowly waking up in China and in the future hybrid cloud models will likely become mainstream as more businesses choose both solutions for different ends.

What are the opportunities and concerns for foreign businesses?

Given the growing importance of data in business operations, cloud computing is a must for MNCs operating in China. However, setting up cloud computing solutions in China presents unique challenges including legislative and technical aspects of MNC cloud options. Despite the uncertainties and challenges, global cloud providers cannot afford to ignore China’s large and growing market. Increasingly competitive domestic players are finding their niche, but multinationals still have an opportunity to shape the market. As a market player it is time to identify target segments and invest in solutions for this customer base, as China’s IT buyers decide how they will take advantage of what the cloud has to offer.

Current regulations stipulate that foreign cloud providers must partner with local Chinese companies to serve customers in China, and the cloud computing industry is still regulated. The main challenges facing cloud computing within, from or to China stem from the information security aspect. This involves issues such as data cross-border transfer, personal information protection, data processing and mining among others.

While its tech market is growing, China still needs to enhance its core cloud technologies and encourage its adoption across markets. According to a recent report by Alibaba, areas that Chinese businesses require the most cloud assistance include IoT integration, mobile security and expansion into overseas markets. However, the convergence of emerging cloud technology trends and China’s increasing demands for the use of cloud services will open cross-border business opportunities. The tech sector will benefit tremendously from collaboration and partnership initiatives between firms in China and the rest of the world.

Mastering the Cloud Economy

How to navigate your approach?

Two characteristics of China’s cloud market may help enterprise vendors navigate their approach.

• Technology providers selling cloud software, services and hardware can strengthen their value proposition by developing a better understanding of cloud economics, customer preferences, and the impact of the cloud’s ascendance in legacy and disruptive technologies.

• State-owned enterprises account for a large share of total IT spending and are highly concentrated in government, banking and financial services. In these sectors, most IT spending focuses on large, complex, highly integrated legacy systems that cannot easily move to the cloud. A large and dynamic start-up scene has emerged in China, and is spending on the cloud. However, that still represents only a small fraction of total IT spending. In the U.S., cloud providers are addressing mainstream companies across industries, but that’s more difficult to do in an economy dominated by state-owned enterprises.

Choosing a Provider

When entering the Chinese cloud market, Alibaba maintains that website load speed is crucial anywhere, but particularly important in the mobile-centric market like China. Thus, the best option to minimize latency, improve SEO visibility, and provide high availability is to host in Mainland China.

The clear local market leader, Alibaba has earned the title of trusted partner for Chinese firms expanding into European availability zones. And with the growth of China’s cloud industry and now with China Gateway, it’s looking to do the same for companies moving in the other direction. Selina Yuan, president of international business of Alibaba Cloud Intelligence says that the “primary challenges foreign organizations face are “security, connectivity and demanding cross-border digital infrastructure setup issues.”

Therefore, for any multinational vendors or business it is important to assess how your business can fit into the proper Chinese ecosystem from both a technology and business perspective.

Author: Jeffrey Craig

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This article Cloud computing in China is the first one to appear on Daxue Consulting - Market Research China.

The unexpected coronavirus epidemic has subverted the way many Chinese people work. On the first day of resumption of work on February 3rd, 200 million people used DingTalk (钉钉)  to work remotely from home. Due to the excessive number of instantaneous visits, remote conference tools in China such as DingTalk, Tencent Meeting (腾讯会议) and Feishu (飞书) had a surge in growth. The video conferencing market in China was put on the map due to the Coronavirus outbreak when white collar workers had no choice but to work remote for two month’s time

Remote conference tools in China were not always popular. Chinese people prefer to discuss business face to face, as it is important in developing business relationships. However, the epidemic has become a catalyst of the boom of telecommuting market. In the past month, hundreds of millions of workers passively participated in a large-scale social experiment of remote conferencing in China. This experiment had not been strictly planned, but rather hastily entered the battlefield on an unprecedented scale. The participants of the experiment included company managers, white-collar employees and a large number of online office product providers. Now that China’s economy is recovering after COVID-19, the phenomenon also raises a question: how the video conferencing market in China will develop after business returns to normal

Source: qimai, Chinese Apple Store Rankings for Chinese remote work tools

The concerns of remote conferencing in China

The greatest convenience of remote conference tools is to save time and expenses of commuting and travel. In the past, the average commute time for people work in Beijing and Shanghai was almost one hour. In addition to getting up early to get prepared, they had to get up two hours in advance. After working from home for an extended period of time, most people found that they woke up later, and their working hours were longer.

As business owners or managers are most concerned about efficiency issues, they may wonder if employees still work hard from home.  They may ask themselves, do employees oversleep or get easily distracted, and can the progress keep up with the company needs? Therefore, it is important to improve online office efficiency and deliver remote office iteration rules once a week. On the first day of “Cloud Office”, most people felt that work efficiency was low because they all measured the efficiency of remote office based on the thinking of on-site office.

In the traditional Chinese office environment, employees are on-site, punching in at 9 a.m. and leaving at 6 p.m. More so than in western offices, it is important to the manager that employees show their dedication by clocking in long hours. The manager was more able to verify whether the employee has worked at least 8 hours by their naked eyes. Now, the manager has no way to verify that they actually worked for 8 hours since employees are ‘hidden’ through their computers. Therefore, many managers simply believed that employee definitely would not work for 8 hours.

Trust becomes a crucial factor for China’s remote work tools market to develop

Business owners and managers can see that everyone is working hard for 8 hours on-site. Even though, in fact, 8 hours on-site does not mean 8 hours of real work. Although there is no way to monitor at home, it does not mean that the work efficiency is lower than on-site work.

A week after the resumption of work, companies adopted the new project management manner said that remote conference did not affect the efficiency of work. Contrarily, it somehow showed higher efficiency than working on site.

‘Trust’ is the most important thing for Chinese managers. Managers should be able to believe that employees can do the same or better jobs at home than they do in the office. In order to support this kind of trust, the corresponding performance measure methods should also be adjusted. They should shift from time contribution to results oriented. Whether business owners could change their methods about performance measure and develop trust in their employees becomes a crucial factor for the remote conference tools market in China to develop.

Competition among Chinese remote conference tools

In February, when the epidemic prevention and control situation was most tense, the average daily downloads of DingTalk, WeChat Work and Tencent Meeting reached 229,400, 205,600 and 217,800 respectively.

These three Apps have been in the top 10 of the Apple App Store free application rankings since February 4th, corresponding to the high download volume and frequency of use. The video conferencing market in China have been greatly boosted during the epidemic. According to Apple App Store data, the current version update frequency for DingTalk is 2 times per week, WeChat Work 1.5 times per week. Tencent meeting is slightly lower, but it has reached 1.3 times per week as well.

Main functions and features of 3 mainstream remote conference tools in China:

WeChat Work: For office scenarios, WeChat Work currently provides free basic applications, including announcements, punching cards, approvals, reports, schedules, and collaboration tools. The basic operations are the same as WeChat and can exchange information with WeChat.

Source: Zhike, WeChat Work video discussion among employees working remotely during COVID-19

Huawei Cloud WeLink: WeLink is an intelligent work platform that Huawei Cloud launched at the end of 2019. It provides functions such as health check-in, information notification, 1,000-person online collaboration, thousand-person video conferencing, audio knowledge audio, cloud documents, online training, and work reports. It also can connect to large screen, smart camera, cloud printer, NFC and other external hardware devices.

DingTalk: The well-established remote conference tool, which has the functions of employees’ groups, group live broadcast, punching cards, online collaborative documents, nailing approval, and logs. It allows external intelligent hardware, audio and video calls. It provides adaptation solutions for industries such as medical, education, and government.

Source: News.nciae, DingTalk online class

Challenges of Chinese remote conference tools

As the epidemic prevention and control situation has gradually slowed down, more and more enterprises have returned to work on site. Daily activity has become the core KPI of remote conference tools in China. The only way to survive in the remote conference tools market in China is to ensure the amount of daily activity. This is not an easy task. There are three problems to be solved behind the video conferencing market in China.

Challenge #1: Building a tight connection between the office and online

A good remote conference tool requires a tight connection between office scenes and various functions. Therefore, users will not experience the split feeling of switching between different software. This requires remote conference tool innovators in China not only have a product thinking skill but also a platform thinking skill.

WeChat Work is an example of one of the successful remote conference tools in China. The version of WeChat Work 3.0, released on the “2020 WeChat Open Course PRO” in January, not only launches an efficiency package, but also a one-stop video function supporting video and audio calls and micro-documents supporting office collaboration. Wechat Work 3.0 also supports the “session mark” function of information processing, opens 13 types of 390 interfaces covering basic capabilities such as communication, storage, and security.

Source: Zhike, Wechat Work 3.0 switches between different software

Challenge #2: Connecting with external customers

The core essence of remote conference tools is to connect customers externally and continue the business. As WeChat Work can connect with WeChat, WeChat Work users can add WeChat personal users, the two Apps are on different platforms, but they can communicate and connect directly. WeChat Work is the only remote conference tool in China that can achieve the insensible connection of C-end touch.

Source: Zhike, Wechat Work user adds Wechat personal user

Challenge #3: Making remote work tools double as marketing tools

As mentioned above, Chinese remote conferencing tools need to connect customers externally and establish their own private database. This is only the first step for remote conference tools in China to survive and establish barriers to new entrants. In other words, they should establish their own ecological network to achieve a closed marketing loop, which is both remote conference tools and marketing tools.

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Come 2020, the Coronavirus crisis acted as a game-changer for the entire industry. Nurturing disruptive innovation, and highlighting the most promising startups, could this virus eventually stretch back fundraising activities in China?

A brief History of startup investments in China

The history of Venture Capital in China begins long before one could imagine for a state with communist underpinnings. Yet, the late 1980s already saw private investment take off, thanks to reforms and new programs launched together to stimulate the Chinese economy.

The ‘Torch Program’ has been the launchpad for China’s high-tech revolution

In 1988, the Ministry of Science and Technology (MOST) launched the ‘Torch Program’, aimed at developing high technology and achieving industrialization. The program established high-tech industrial development zones across the country, gathering scientific and technological resources, as well as talents and money. These high-tech zones include three major parts:

• Science and Technology Industrial Parks (STIPs) to develop the commercialization of emerging technologies and research. China set up 54 STIPs, which accounted for close to 50 percent of all of China’s R&D spending.
• Productivity Promotion Centers (PPCs), incubators designed at providing consulting and product testing services.
• Technology Business Incubators (TBIs) support the growth of Chinese startups by providing incubation services, such as free office spaces.

Torch truly enabled China’s high-tech revolution by being critical to the growth of large international tech companies such as Baidu, Lenovo, ZTE, Alibaba, and Huawei. According to Steve Blank, one of the first to write about the rise of China’s VC market, “of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.”

Output’s estimations of the Torch Program display the importance of Torch parks as an engine of Chinese technology in the economic growth of the country. Thus, the initiative is responsible for 11% of China’s GDP, and more than 10% of China’s industrial value.

[Source: LinkedIn, The ‘Innoway’ incubator of Zhongguancun Science Park, the first STIP to be established, in the suburbs of Beijing]

Seed funding in China brings capital for early-stage startups

Even if the Torch program enabled startups to access financial resources (by 1991, 70 percent of them received bank support), those were generally at a later stage of development. To bridge the financial gap for early-stage startups to access larger investments, the State Council launched the Innovation Fund, known as ‘Innofund’. This initiative provided small and medium tech companies with capital raised from local governments, banks, investors, and enterprises. By 2014, the found backed more than 30,000 Chinese tech startups, allocating over RMB 19 billion ($2.7 billion) to kickstart early-stage projects.

State-sponsored venture capital funding to support state-owned companies

Since the mid-1990s, the Chinese government extensively encourages investments in technology and IT infrastructure. Innovation became one of the only areas in which the government allows venture investments, with state-sponsored VC funds becoming a popular way for local authorities to finance projects. These government-backed funds were meant to invest primarily in state-owned companies with the goal of increasing quality standards to compete with international companies.

To attract even more capital into technology startups, the MOST launched the first of many state-owned ‘guidance funds,’ in 2007. The fund invests in VC funds in targeted sectors of interest, as well as co-investing alongside other VC firms. In 2018, there were more than 2,000 operating guidance funds, with total funding reaching RMB 5.3 trillion ($790 billion).

[Daxue Consulting – The history of the VC market in China]

Foreign investment in China represents a third of China’s venture capital investments

In 2018, foreign VC funds contributed to more than 30% of startup investments in China, most of them using USD to raise funds. Nonetheless, an increasing number of these foreign VC firms are now considering raising funds in China using its local currency, Renminbi (RMB). Since the 2010s, RMB funds are becoming increasingly attractive to foreign investment in China. Thus, non-RMB funds are not currently allowed to exit via IPO on domestic exchanges, an option only made available by RMB funds. Overall, local-currency funds benefit from less regulatory supervision and greater flexibility regarding the sector of investment.

[Data source: Pitchbook, 2018 Chinese VC deals by investor location]

How innovation and Chinese tech giants shape the Venture Capital market in China

China’s VC market has seen a dramatic rise over the past five years, heavily relying on robust financial infrastructures. A strong regulatory system, open market, and the diversification of ways of exiting build this financial pedestal. Aside from this trend, the distinctive growth story of the tech investments in China can be explained by the two following trends:

Entrepreneurship promotion and innovative ecosystem

In 2014, Premier Li Keqiang introduced the principle of “Mass Entrepreneurship and Innovation” to support the development of innovative startups. Since this announcement, the government has created favorable conditions for the development of micro-companies. Tax Incentives for Mass Entrepreneurship and Innovation cut the corporate income tax of small businesses by half, and days required to start a business in China have considerably fallen from close to 30 down to less than 9.

[Data source: World Bank, how long it takes to start a business around the world]

According to the Global Innovation Index (GII), China is gradually closing the gap with other highly innovation-skilled players such as Germany and the United States. The country leapfrogged from the 26^th place in 2016 to the 14^th in 2019. The index lists knowledge and technological output as the first area of capabilities of China to thrive into global innovation. With 7.4 million university graduates in 2017, China has boosted the number of students qualified for higher education. In 1997, only 5.5% of college-aged students were enrolled in universities, against 55% in 2017. This growing educated population represents a significant pool of knowledge to nurture research and technological outputs.

If capital such as R&D expenses is commonly regarded as the driving force behind scientific innovation, startups born from theses researches foster Venture Capital firms that seek return on investment from these highly promising new-born companies. From the 1980s, capital injected to promote entrepreneurial spirit and build an innovative ecosystem of incubators eventually enabled the Venture Capital market in China to bounce in recent years.

Unicorn startups in China

The intertwined links between the growth of an innovative technology ecosystem and the Venture Capital market in China can be assessed through the number of unicorn startups in China. These privately held startup companies with a value of over $1 billion represent an indicator of the degree of implication of both VC firms and tech startups in the Chinese innovation landscape.

[Data source: Deloitte, Location of Unicorn startups in 2019]

Baidu, Alibaba, and Tencent: Venture Capitalists gluttons

Chinese tech giants, known by the acronym BAT (Baidu, Alibaba, Tencent) dominate the Chinese consumer journey, providing an extensive range of services that cover every segment of daily-life activities. Initially, each of these companies started with a single business. Baidu provided an internet search engine, Alibaba was a B2B marketplace, and Tencent was a messaging application. As Chinese consumers quickly embraced mobile internet technologies, BATs rapidly expanded their strategies to meet consumer needs.

As BATs want to capture every minute of the day’s availability from Chinese consumers, they represent a significant investment force in startups in China. They invest through their corporate funds, a practice called Corporate Venture Capital (CVC). According to Pitchbook, the top three technology companies in China had made more than 920 Venture Capital investments by 2018. Importantly, the Minister of Science and Technology has publicly stated his strategy to use BATs to accelerate the country’s leadership in three strategic sectors: Baidu oversees accelerating autonomous driving, Alibaba the smart cities, and Tencent the computer vision.

The government’s involvement in BATs’ strategic axes and their investments echoes the multiple funds-of-funds that have accompanied tech investments in China since 2007. For example, BATs have invested in nearly a third of Chinese Unicorn startups. Recently, Baidu, Alibaba, and Tencent all invested in the rise of the short video apps lead by ByteDance.

[Daxue Consulting – The mechanisms behind the Venture Capital market in China]

The ‘capital winter’ was there before the Coronavirus

The venture capital investments of the past five years fostered a new generation of startups, from Tiktok’s parent company ByteDance, to the ride-hailing giant Didi Chuxing. 2018’s forecasts about the Venture Capital market in China were still predicting the trend to keep its growth pace towards more deals backing the Chinese startups. However, after five years of exponential growth, the trend is now reversing.

The second quarter of 2018 marks the peak of tech investments in China, with digital-payment giant Ant Financial closing a record US$14 billion deal. In the meantime, lifestyle-services giant Meituan-Dianping raised US$4 billion, while Q1 saw Didi Chuxing secure a US$4.6 billion investment. By comparison, 2019 Q2’s largest venture deal was a $1 billion investment in JD.com’s affiliate healthcare branch.

[Data source: Crunchbase, 2016-2019 Chinese VC deals, and dollar volume]

The tech investments in China plummeted from US$93.8 billion in 2018 to less than US$40 billion in 2019, evidencing the ‘capital winter’, which defines a significant slowdown in fundraising and investment activities. As China increasingly positions itself as the engine of global innovation, which factors precipitated the winter for the Venture Capital market in China?

Investors are becoming more cautious than ever

Alexandre Dorangeville, vice-president at Rochefort & Associés, a cross-border investment bank, told Daxue Consulting the VC market in China is likely to come at the end of a cycle.

“Some companies – Ofo, Luckin Coffee are the classic cases – displayed the ability to burn cash without showing any ability to become profitable.” 2018 set the expectations of the investors very high, and the results have not yet come up to the desired outcomes. Additionally, poor post-IPO performances of several Chinese tech companies, including electric car maker NIO and smartphone manufacturer Xiaomi achieved to undermine investor’s confidence.

However, the sector is far from depressed. Financial data provider company Preqin estimates the amount of capital waiting to be deployed of Asia-focused Venture Capital firms to be about $95 billion. It is not the shortage of money, but rather that investors are more critical and selective. As a sign that investors behave less risk-taking, Bruno Bensaid, angel investor at Shanghaivest, observed that early-stage startups have been hit the hardest.

Trade War worsens the general economic downturn

The trade war and the general slowdown in the Chinese economy also affected startup investments in China. In 2019, the U.S. government blacklisted a swath of Chinese tech companies, including telecommunication giant Huawei, and the Alibaba-backed AI startup Megvii. As the United-States remains a hot choice for Chinese startups to exit via IPOs, the trade war affects foreign investment in China, who have limited exit options. Another blacklisted company, the most valuated AI Chinese startup SenseTime, was reported scrambling to survive after losing access to U.S semiconductors, necessary for the continuity of its operations.

On the bigger picture, the development perspectives of Chinese startups are intrinsically linked to the country’s economy. However, it is showing clear signs of deceleration, with a historically low level of growth.

Assessing the Coronavirus impact on tech investments in China

While the Venture Capital market in China relies primarily on meetings between investors and co-founders, travel restrictions froze the entire industry. As a result, the number of deals during the Coronavirus drop-off to nearly zero during the last two weeks of January 2020. Instead of canceling its meeting with 30 startups, Sequoia Capital China decided to organize an online pitch contest during the quarantine.

The Coronavirus impact on startup investments in China pushed  the ongoing trend towards further caution, said Dorangeville. According to him, assessing the impact of the crisis on the portfolio is the immediate task for investment funds to carry out. “The teams are currently focusing on existing assets and redirecting their cash to portfolio companies to ensure their survival, rather than investing in new deals.”

In the first quarter of 2020, we saw the first contraction of China’s economy in more than forty years. According to data published on April 17, 2020, by the National Bureau of Statistics, the GDP officially plunged by 6.8% compared to the first quarter of 2019.

Thus, the winter could be longer for tech investments in China.

Changes in consumption and tech advancements from the Coronavirus in China

During the epidemic, more than 20 province’s government worked with technology companies to build AI solutions to the Coronavirus in China to report epidemic related data and feedback, providing invaluable advice for public crisis management of priority populations. Part of the tech advancements from the Coronavirus in China, we reported the deployment of disinfection robots in hospitals, big data-powered QR codes and smart image reading systems.

Even if the Coronavirus created a fertile environment for AI, big data, and robotics developments in China, it is not likely to foster a new breed of highly promising startups. Indeed, tech advancements from the Coronavirus in China responded to a specific demand to contain the outbreak.

However, results from Daxue Consulting’s analysis during the Coronavirus show great changes in Chinese consumers’ habits. According to Daxue Consulting’s report, more than 70% of the Chinese tried at least one new service for the first time. The highest are online learning and working from home apps, followed by live streaming and online diagnosis. These online services are will likely keep a strong growth, with 73.6% of people saying they will continue to use it online after the epidemic.

[Data source: Daxue Consulting research, changes in Chinese consumer behavior after the Coronavirus outbreak]

As far as the Coronavirus created a boon for innovation in China and new habits of consumption, does it necessarily mean new opportunities for startup investments in China?

Could Startup investments in China eventually bounce back?

According to Pitchbook, there were 66 deals for the week ending on March 28, 2020. This is the most of any week so far this year and just below the figures from the same time last year. Online learning gaining the most traction from the Coronavirus, Chinese online education startup Yuanfudao managed to raise US$1 billion.

Dorangeville said the post Coronavirus impact on startup investments in China is likely to see Corporate Venture Capital –BATs’ funds being the largest ones on the Chinese VC market – taking the opportunity to close exclusive deals. CVCs in China have a longer-perspective in their investments and the cash available to look at current deals. They will therefore be better able to restart bargaining at low prices by being one of the only sources of financing for the Chinese startups.

“However, this will only be the immediate impact of the Coronavirus,” says Dorangeville, “On the long-run, I think that the 2019 trend will be reinforced after the Coronavirus crisis: investors in China will be even more cautious, taking distance with cash-burning business models and being more active in their post-investment portfolio management companies.”

Author: Maxime Bennehard

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SARS has caused a significant impact regionally and globally. There were 8096 confirmed cases while 7429 of them were in China. The virus had caused 744 deaths, and 685 of them were in China. 26 countries, areas and territories were involved.

Impact on China’s economy during the SARS outbreak: service sector suffered the most  

Originating in China, SARS impact on the Chinese economy was profound, though not to the extent of COVID-19. All the industries in China experienced significant downturns in Quarter 2, 2003, especially the service sector was hit the hardest and GDP growth rate decreased by 1.8%. As for primary industry (mining, farming and fishing) and secondary industry (manufacturing), the GDP growth rate dropped by 1.1% and 0.9% respectively.

[Data source: Sina finance, ‘GDP Growth Rate per Quarter (2003)’]

[Data source: Sina finance, ‘GDP Growth Rate per Quarter by Sector (2003)’]

Nevertheless, in the third quarter, most industries had recovered and rebounded to the average level except for the service sector. Moreover, it took an extra three months (until the fourth quarter) to regain the previous growth rate.  

Alibaba’s crisis management strategy during SARS

The impact of SARS on Alibaba

Date through back to 2003, Alibaba was still a relatively small enterprise that specialized in B2B e-commerce. Additionally, it acted as an intermediary that connected export suppliers in China to international buyers.

[Photo source: the street.com, ‘Logo of Alibaba’]

Damaged reputation: Alibaba was blamed for sending employees to the Canton Fair in 2003

During the SARS outbreak, Alibaba born the bad reputation of spreading SARS in the city of their headquarters, Hangzhou, due to the employee’s business trip in Guangzhou.

Jack Ma sent an Alibaba employee to participate in the 92nd Canton Fair in Guangzhou. After the employee’s travel from Guangzhou, she was diagnosed with SARS and become the fourth SARS patient in Hangzhou. As a result, more than 500 Alibaba employees were forced to quarantine and work at home. People in Hangzhou suspected that the Alibaba employee carried and spread the virus in Hangzhou and Alibaba became notorious at that time.

Business obstacle:  loss of business opportunity

During the SARS outbreak, many business activities shut down temporarily, including exhibitions and order deliveries. Traditional business models came up against roadblocks. Owing to the out-of-control situation and employees’ quarantine, the world’s largest B2B website was under lockdown. Apart from Alibaba’s business, during the period of 92nd Canton Fair, Alibaba’s clients and other exhibitors were reluctant to attend the fair. Offline commerce was not an option during the outbreak.

Alibaba’s response to SARS

Agile adaptation: switching to working at home rapidly

Alibaba made a rapid decision, all employees were required to work at home after May 6th 2003. This would have been unheard of in 2003, a less digital-savvy era. However, Alibaba employees were ready to work from home almost immediately. The technical staff of the engineering department set up the necessary equipment for employees to work at home within 2 hours.  

[Photo source: Sohu, ‘Alibaba Employee working at home during SARS outbreak’]

Internal communication: extensively utilizing online communication channels and providing mental support 

Jack Ma, as the founder of Alibaba, enhanced internal communication with Alibaba employees after the announcement of quarantine. Firstly, Jack Ma sent an email to all employees to comfort them. He also encouraged the staff to look at the positive side and tackle the new challenge. Secondly, Jack Ma initiated the extensive use of email and instant message software to improve the efficiency of communication with employees. He believed this kind of internal communication was more efficient and straightforward. What is more, Alibaba organized online group chats and held online singing competitions as means of providing the emotional support.

[Photo source: Huashang Taolue, ‘Jack Ma and Alibaba Employees during the SARS outbreak’]

Crisis as a mission: exploring a business opportunity

The SARS crisis response of e-commerce companies like Alibaba pushed e-commerce development in China. Taobao officially went online on May 10th 2003 as a result of discovering the need for online shopping during the epidemic. Jack Ma established a small R&D team to compete with E-commerce giant eBay. Also, Alibaba provided support and service for SMEs to transfer to online businesses.

The result of Alibaba’s crisis management

Due to Alibaba’s quick action, service was not suspended one day. The SARS crisis witnessed Alibaba’s solution to overcoming significant challenges, which made Alibaba’s team more committed than ever. 17 years ago, Alibaba was a relatively small scale of the firm. Nowadays, it has become the most significant internet enterprise in China with a market value of 3.89 trillion RMB. Surprisingly, some of Alibaba’s critical business decisions that led to the company’s future success arose during their SARS crisis management.

Increased brand awareness and business volume: surging business volume and members

Alibaba broke its record by reaching the highest business volume. On May 7th, the first day of remote work, the company achieved 12,500 business leads in China’s market. During the SARS outbreak, the daily amount of business opportunities surged by 3-5 times in comparison with the same period of 2002. As a consequence, in March 2003, Alibaba accumulated 3,500 new members per day and increased by 50% from the previous quarter. Moreover, the amount of Alibaba’s membership had increased significantly. 42% of the total members (1.4 million members in total) claimed that they became Alibaba’s members during SARS.

The game-changer in China’s market: Taobao went public successfully and has changed Chinese consumer behavior

Since Alibaba’s SARS crisis management turned out to initiate their online shopping business, the company successfully fulfilled Chinese peoples’ new demands and turned them into online shoppers. More and more people knew about E-commerce and digital technology. As a result, Taobao went public successfully and has become one of the representative e-commerce retailers in China.  

Ctrip’s crisis management strategy during SARS

The impact of SARS on Ctrip

In 2003, Ctrip had become the largest hotel distributor and online travel agency in China. During the first quarter of 2003, because of its mature business and profitability, its listing was around the corner.

[Photo source: ChinaDaily, ‘Logo of Ctrip’]

Reduced business volume: plummeted business activities that had nearly led to bankruptcy

During the SARS outbreak, Ctrip’s business performance suffered. With decreased demand for travel, the business volume of Ctrip experienced a substantial decrease. One Ctrip employee recalled that the workload declined by 70% at that time. The epidemic had also ceased Crip’s collaboration with hotels and airlines. If it lasted several months longer, Ctrip would have gone bankrupt.

Plummeted turnover: Ctrip’s business performance was in danger

The SARS outbreak worsened Ctrip’s business operation. Its operating profit fell below the company’s benchmark profit and loss line, and revenue went down by 42%. The performance of the tourism industry in China suffered during the SARS outbreak, and China’s domestic tourism spend decreased by 11.2% in comparison with the year before.

Ctrip’s response to SARS

Quick strategy adaptation: flexible working schedule and alternatives

Ctrip adopted a rotation system for employees to deal with the decreasing staff workload. The company has also provided subsidies for rotating personnel to keep business operate regularly. Managers and some staff were required to work for half a day. Nevertheless, they would get 60% of their original salary.

Ctrip also developed alternatives to utilize its business resources efficiently. The company collaborated with China Merchants Bank and sold credit cards. Moreover, Ctrip also rented its call center out to China Merchants Bank.

Employee care policy 

Ctrip implemented employee care policy during the SARS outbreak. Liang Jianzhang, the CEO of Ctrip, sent several letters to encourage employees. The company also promised that they would not lay off any employee and even retained the employees whose contracts had already expired. 

Internal upgrade

Ctrip optimized its business process during the industry recession. What is more, the company provided training courses for employees and encouraged them to improve themselves during the SARS period. Customer service staff stepped up to recite various helpful business information such as call scripts, operation procedures and maps.

The result of Ctrip’s crisis management

Strong rebound after the epidemic

Ctrip capitalized on the expected business rebounded after the epidemic. The expected retaliatory consumption in China’s tourism industry came true. Owing to Ctrip’s policy of retaining employees and improving employees’ abilities during their SARS crisis management, Ctrip became the winner in the tourism market. In 2003 Q3, Ctrip’s turnover reached 66 million RMB and increased by 73% from Q1. Its outstanding performance had facilitated its IPO on the NASDAQ Stock Exchange.

[Data source: 36 Kr, ‘Ctrip’s Turnover’]

Successful IPO

Crip’s rapid growth after the epidemic made it famous in the capital market. On December 9th, 2003, Ctrip successfully listed on the NASDAQ Stock Exchange. On Ctrip’s first day of trading, it closed 88.5% higher than the initial offering. Such a prominent performance made Ctrip become the first company that doubled its share in one day since 2000.  

[Data source: Google Books, ‘Ctrip’s Highest Share Price in 2003 and 2004 (USD)’]

P&G’s SARS crisis management strategy

The impact of SARS on P&G

P&G entered China in 1988 and have become a thriving market player since 2003. China was P&G’s sixth-largest market, up from tenth just three years earlier.

[Photo source: ChinaDaily, ‘P&G in China’]

SARS impact uncertainty and market demand uncertainty

P&G assumed that the SARS outbreak caused market turbulence and changed consumer behavior. As a result, the situation matched with their assumption. From April to September 2003, the market demand for FMCG experienced wild fluctuations. For example, in April, the demand of anti-bacterial cleaning products increased drastically while plummeted in May due to consumers’ sufficient stock at home. From June to September, as summer closed in and people improved their cleaning habits, the demand for cleaning products increased again.

P&G’s response to SARS

Action before the crisis: market demand prediction

P&G made market demand prediction before the crisis to eliminate the loss caused from being unprepared for fluctuations. The company headquarters is in Guangzhou, the epicenter of the SARS outbreak. P&G China had already paid close attention to the issue. The company decided to make some business adaptations during the period of January-February 2003 when the impact of the epidemic was still unknown. P&G predicted that the demand for cleaning products would surge and the market would face a huge challenge. These had indicated that P&G China had been fully ready for the crisis.

Quick response to the crisis: the establishment of the emergency response system regarding capacity

P&G China also established an emergency response system to confront the situation. In March 2003, the outbreak in Hong Kong was severe, and the demand for Safeguard soap soared. This was a signal that demand for Safeguard was likely to soar in mainland China.

The P&G supply chain began to prepare an emergency response system. Once the demand for the Safeguard reached a target number, the system would be activated, and the production line of P&G could be produced at full capacity as planned.

At the height of the crisis, the government requested that Safeguard cannot be out of stock in Beijing. Therefore, P&G deployed the products from less affected areas to Beijing while increasing the output.

The result of P&G’s SARS crisis management: expected sales performance

In April 2003, the production of Safeguard set a record without selling out of stock. Moreover, the supply and inventory quantity of Safeguard in each city were entirely in line with headquarters requirements during SARS.

Sales of Safeguard during SARS soared by 40%. SARS had rapidly promoted the sales of Safeguard in China. It became an essential external factor in boosting Safeguard’s healthy development in China.

What can we learn from these three SARS crisis management strategies: Business adaptation, predictions, and employee care

“When facing crisis, we should not see it as opportunity. Instead, we should consider what trouble people encountered, how we can offer help.”

Jack Ma, founder of Alibaba

No matter the era, the country, and the crisis, the ability to adapt, make predictions, and care for employees is crucial in crisis management. Alibaba displays the power of adaptability by changing to remote work in only two hours, and again in catering to new consumer e-commerce demand. P&G showed us the power of forecasting supply and demand during a crisis. Ctrip reaped the benefits of retaining employees through tough times.  

Author: Amelia Han

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This article SARS crisis management: 3 inspiring cases that changed China’s business landscape is the first one to appear on Daxue Consulting - Market Research China.

1. Creating a Chinese business name

Finding an appropriate Chinese name for your company is a requirement. Once you have registered a Business Name, you may go a step ahead to getting a logo for your new business. All these three should be unique and not like any other registered business. This will be the trademark of your business and if in doubt over the name, logo or domain selected, there are sites that can help you know if the one you select or create has already been taken. By failing to do so, you may end up registering using either a business that closed or one that never took off, eventually bringing confusion to prospective customers who search for your business.

When starting a business in China, there are certain research strategies to find a solid business or brand name. Unless you are a native Chinese speaker, it is not advised to choose a name yourself. There are many underlying factors to maneuver. For one, dialects; something that sounds nice in Mandarin may translate to something unappealing in Cantonese or Shanghainese. Secondly is tones. Although a translation of a brand name might accurately describe the brand, Chinese speakers are sensitive to how tones of syllables fit together. Hence certain phrases may sound poetic and charming, while other phrases may sound unappealing. Third is meaning. Some brands choose to transcribe the sound of their brand in English to Chinese without considering the meaning. This can be disastrous if the characters used have a conflicting meaning with the brand purpose.   

2. Have a business plan backed with market research

Failing to have an established business plan is like planning to fail. One thing that a new start-up again may confuse is a Business Plan and a Business Structure. These are two different things. First, doing some research and deciding whether to be a Sole Proprietor, venture into a Partnership or register a company, should be the first step into knowing what business plan to have. Once you have decided on the type of business, you can then lay down the plan. Contained in a Business Plan are aspects of funding as well as what type of business venture to undertake. It will also entail how you plan on spending, so as not to over or underspend.

When starting a business in China, market research is an important part of a business plan. Consumer research like social listening or focus groups can help brands understand their target consumer preferences. Feasibility research and market sizing help companies understand the practical steps to take the capture their share of the market.

3. Create a business structure that supports flexibility

A business structure is different from the business plan. While new startups confuse this, they eventually lack a management scheme and gradually finish to poor management. So, a Business Structure is what entails what every employee in the business is to do. From the executives, accountants, superintendents, junior staff to all other working employees. When deciding on what structure to have, it is advised to seek the knowledge of professionals and experts in the field as such, professionals such as lawyers, accountants, and even some business people may help you understand and decide on the best business structure for your business.

Adapting to a more Chinese business structure can be quite demanding. Higher ups in Chinese companies demand a lot from inferiors, but in turn, treat them like family. Although often being very hierarchical, Chinese companies tend to be more nimble than their western counterparts. Companies that aim to compete in the rapidly changing Chinese market must also have a business structure that supports flexibility.

4. Finding the right business location

This is a vital element. For those looking to register a business in China, failing to understand the laws of the land could lead to problems. Again, this is among the biggest problems faced by startups. You will need to understand laws relating to taxes, registering the business as well as the many different laws within the country. So, to avoid legal when starting a business in China, it is similarly advised to seek the counsel of those experienced in the field or do thorough research.

Many foreigners who are starting a business in China flock to cities like Shanghai and Beijing. However, although China’s megacities are well-connected and have a lot to offer, it is worth considering smaller cities where prices may be lower. For example, setting up a business in Hangzhou is great for online companies.

5. Finding your competitive edge

The nature of the business is an essential aspect in determining how things will be run. In other words, this is a sure way to set yourself apart from other ventures depending on the type of business you carry on. Note that, this is also an aspect in the Business Plan, and because of that it should be a well-researched type of business to avoid huge competition. Though competition is good, you will need to offer something new to the competitive edge so as to keep the light on.

Without a competitive edge, in the competitive Chinese market, brands are forced to compete by price, which means taking slim profit margins. In the food and beverage industry, a competitive edge could be health and safety. Chinese consumers are growing more health conscious, and especially since the COVID-19 outbreak, consumer have health on their mid.

Never stop learning

So, considering these factors carefully, you will be on the way to having a fruitful business. It is also recommended to do more research over the matter of opening a business to have enough knowledge when you do so.

For those seriously considering starting a business in China, learn from those who have succeeded before you. The China Paradigms podcast series has over 100 stories from entrepreneurs in China, from a wide range of backgrounds and industries. You can find the podcast on Apple Podcasts, Spotify, Soundcloud and Youtube.

Listen to China Paradigm on iTunes

This article 5 Things everyone gets wrong when starting a business in China is the first one to appear on Daxue Consulting - Market Research China.

While the epidemic is expanding globally, Chinese economy is gradually emerging from its lethargy. After the country’s quarantine has just ended, Chinese consumer behavior is no longer the same as before. During the epidemic, we have seen giant brands cutting down their operation like Ikea, Starbucks, and McDonald’s. The chain of events leads to the need of Coronavirus crisis management in China.

Crisis management in China have never been more critical for brands, which had to adapt their operation strategies to protect their employees and customers from contamination to stay afloat. From fast food to e-commerce, including AI and transport, here is an overview of the measures taken by leading brands in these industries to handle the coronavirus crisis, and how they bounced back

Didi’s Coronavirus crisis management in China: Keep driving through the epidemic

Reports of multiple drivers being diagnosed with the coronavirus affected China’s ride-hailing service market, while travel restrictions across the country had already hit the industry hard. Concerns have arisen over potential infections after a driver on Didi Chuxing, China’s largest ride-hailing company, was diagnosed with the coronavirus in early February. Under these not-so-favorable circumstances, Didi Chuxing has taken strategic steps for Coronavirus crisis management  in China.

A special fleet for medical workers and citizens

After shutting down service provision in a range of cities including Wuhan and Beijing, the company has deployed two exclusive fleets of drivers dressed in protective uniforms with regularly disinfected vehicles. The 1,336 volunteer drivers operated in Wuhan, the epicenter of the outbreak, and in Shanghai to provide free transportation services to all hospital staff. Didi’s special fleet is said to have transported more than 9,500 medical workers in Wuhan and Shanghai. This measure is the first one to be listed in the “Didi on the frontlines, Didi in action” feature, directly accessible on the Didi application. The company also said to have RMB 200 million (around USD 28 million) mobilized for protective medical supplies and allowances for these fleets.

[Source: Didi, Weibo – The special fleet for medical workers in Wuhan]

The in-app feature is entitled ‘Your ride is protected, travel with peace of mind’, detailing rules to be followed by both drivers and riders to protect themselves from contamination including standards for masks, ventilation, and vehicle cleanliness. The ‘Safety Center’ of the application has been updated to include these safety rules. The company’s main communication channels, the Didi app and the Weibo social media account, followed by 3 million people, are mobilized to spread the messages from the company to the community. During the outbreak, Didi has posting daily on its Weibo account.

[Source: Didi app – Coronavirus crisis management in China]

Special measures for special drivers

In the boring-at-home times where scrutinizing and reacting to the news has become the main Chinese consumer behavior, an agile communication strategy in China is vital to keep control over one brand’s image. On February 4, Chinese social media Weibo ignited after a Didi driver was diagnosed with the Coronavirus. “Didi is in touch with the driver and will provide extra subsidy for him during the treatment,” the company said in a quick reaction on February 6. “We have provided relevant information to the local government and are working closely with them on virus prevention and control.” Following this measure, the company released a special insurance program providing a daily allowance up to RMB 30,000 (USD 4,300) for any driver who is hospitalized for the Coronavirus.

To enhance the safety of the drivers and passengers, the ride-hailing company opened ‘driver epidemic prevention service station’ in 106 cities across China to distribute face masks, disinfectant, and other anti-epidemic materials to the drivers.

[Source: Didi, Weibo – one of the 106 ‘driver epidemic prevention service station’]

As the number of passengers drops during the epidemic, Didi wants to showcase that its cars remain the safest means of transportation. In order to further safeguard citizens’ safety on the road, DiDi introduced the “epidemic prevention” QR code, which includes the sterilization records and register information of each car. On the Weibo account, numerous pictures illustrate the disinfection of vehicles by the drivers.

The results of Didi’s crisis management in China

DiDi’s timely Coronavirus crisis response received positive feedback from society, strengthening DiDi’s brand awareness in China. The Huhhot government reported DiDi’s response to the coronavirus epidemic on February 29^th, and praised its actions on preventing and control the disease.

[Source: Didi, Weibo –Positive social reaction]

After DiDi announced to take actions to prevent the spread of the virus, a Weibo post about DiDi’s handling of the crisis went viral. Many Chinese netizens praised DiDi’s efforts to act as a socially conscious company. As of early March, since the virus has been under control in mainland China, resident trips in major cities has increased by more than 30%.

McDonald’s coronavirus crisis management in China: Safeguarded meals

“China is a critical market for us, and we’re very concerned about the situation over there” CEO of McDonald’s said late January. Adding its name to the list of global companies bracing themselves for the impact of the coronavirus outbreak, the American fast-food chain decided to shut about 300 restaurants localized in areas where the spread of the epidemic was significant. With 3,000 restaurants still in operation across China, what measures have been taken to ensure the safety of both employees and customers?

A special Coronavirus crisis management team to deal with the outbreak

McDonalds was checking the temperature of customers as early as January 2020. While the coronavirus crisis was in its infancy, the company was already well prepared to protect the health of its employees and customers. Thus, strict in-store prevention measures were taken such as equipping stores with hand sanitizer for customers and disinfecting frequently touched surfaces

According to its CEO, the American company decided to set up a special crisis unit to deal with the outbreak. Handling Coronavirus crisis management, the unit’s work has been witnessed through a specific communication strategy with a campaign called ‘放心送’, meaning ‘worry free deliveries’. Indeed, Chinese consumer behavior during the outbreak involves ordering delivery rather than going outside for lunch.

[Source: Eleme饿了么 – McDonald’s ‘放心送’ campaign to adapt Chinese consumer behavior during the epidemic ]

Contactless delivery during the Coronavirus outbreak in China

On February 1st, McDonald’s launched a contactless delivery service available on food ordering platforms such as Meituan美团, Eleme 饿了么, and its own application. As people rely massively on Meituan美团 and Eleme饿了么 to order meals, the company’s communication strategy in China has paid attention to get visibility on these third-party platforms. Following six epidemic prevention principles, the contactless delivery service aims to ensure the delivery of safe meals. Temperature is systematically checked, from the cook to the delivery person, restaurant and kitchen are regularly disinfected as well as the delivery box and the delivery bike. Employees are required to wash their hands and wear a mask. The meal is dispatched in front of the residences as deliverers are not allowed to make door-to-door deliveries. All delivery orders are accompanied by a ‘Safety Delivery Card’, which indicates the name and temperature of the prep and delivery staff.

[Source: daxue consulting ‘Safety Delivery Card’]

Free meals for medical staff

Following Didi’s strategy to be present on the frontlines directly offering its core services, McDonald’s is offering free meals to medical staffs fighting against the coronavirus. One week after the opening of a dedicated restaurant in Wuhan, on February 3, the company announced on Weibo to have delivered around 3,500 free meals to support the battle.

[Source: McDonald’s Weibo – Free meals distribution to medical workers in Wuhan, a key component of their Coronavirus crisis management strategy.]

The result of McDonald’s crisis management in China

Due to McDonald’s quick strategy adaptions, around 3,000 offline stores operated as usual during the coronavirus outbreak, which have minimized financial loss. To further support its customers, the company introduced a Big Mac Burger combo and named it as “助你一BIG之力” (‘spare no effort to help you’.) The combo only costs 20 RMB and was available from March 4 to March 24. To convey positive energy, McDonald’s started a topic called “助你一BIG之力” on Weibo, encouraging consumers to create DIY “cheer up” cards.

The company has won respect and support from Chinese consumers, evidenced by their engagement to support the brand on the Chinese social medias. Under one of McDonald’s WeChat posts with 100k+ reads, one reader said she is greatly moved by learning the news that McDonald’s delivered free meals for medical workers, and she will continue to support McDonald’s.

McDonald’s once again proves that beyond the name and the symbol, it embodies the concept of Globalization: think global, act local. Indeed, its Coronavirus crisis management and communication strategy in Chinaare testimony to the brand’s capacity to successfully adapt to local market constraints.

Baidu’s crisis strategy – AI for a safer world

BBaidu, the tech giant that operates the country’s largest search engine, spares no effort to help those working to stop the Coronavirus outbreak. Predicting that the turnover in 2020 Q1 would fall by 5% to 13% compared with the same period last year, Baidu’s online advertising and marketing service sector is badly affected by the epidemic.  However Baidu’s internet search solutions may benefit from the situation, since people are much more likely to do research and stay informed of new developments. Thus, from January 21 to 24, more than 1 billion people on average searched or browsed information on 2019-nCoV on Baidu every day.

Baidu’s crisis strategy during the Coronavirus involves  AI and big data. In 2017 the company made no secrets of its ambitions to become the first global company in the Artificial Intelligence sector. Well, it seems that Baidu brilliantly took advantage of the recent events to show off its AI-fueled muscles, aiming to improve its brand awareness in China and beyond, in this specific field.

Baidu uses AI to predict virus’ secondary structure

On January 30, Baidu Research Institute opened up ‘LinearFold’, its RNA prediction algorithm, to global genetic testing agencies, epidemic prevention centers, and scientific research institutes, for free. The ‘LinearFold’ deep learning tool only takes 27 seconds to solve the RNA secondary structure of the 2019-nCoV — 120 times faster than the top classic algorithms. This tool, which could appear to the uninitiated as a gadget for biologists, is one of the latest breakthroughs in the medical field and an opportunity to better understand the virus and develop targeting vaccines.

New features to spread knowledge

On its search engine and map applications, the tech company has set up a powerful information center closely following the reported new cases and providing insightful trend data. The application menu shows real-time infected cases at several scale levels, evolution curves, location of the nearest hospitals, top researches of netizens on the virus, as well as options to take free online courses. The platform displays the number of visits to the information center, which reached more than 2.5 billion views.

[Source: Baidu app – Information center about COVID-2019 m]

Among others, a new self-testing feature using AI and big data is available from February 11. After the user has entered basic information about his state of health, the tool reviews a new coronavirus pneumonia diagnosis and treatment scheme and combines many online consultation cases. For the better or worse, it gives diagnostic probabilities of infection.

Big data powered maps

The tech company has also integrated the coronavirus outbreak into its Map app, making it easier for people to avoid contaminated areas. The company had built a special ‘epidemic map’ which shows the location of both confirmed and suspected coronavirus patients in real-time.

[Source: Baidu Map App – The ‘epidemic map’]

Another interesting tool is the ‘Migration Trend Map’ feature. People can check the migration status of all Mainland cities from the first day of the Spring festival to now. In 2018, it was estimated that Chinese travelers made around 3 billion trips during the 40-day Spring Festival period. The feature is useful when it comes to making travel plans to go back home at the end of the Chinese New Year and avoid the rush. After entering Baidu’s migration platform, people can select the ‘migration destination’ or ‘migration source’ of a city and view the graph of migration trends compared to last year’s one. While it’s not clear how the epidemic map collects data to ascertain the locations of the patients, the migration map is powered by the positioning data from users of the standard Baidu Map service, which has been densified to ensure privacy.

[Source: Baidu ‘Migration Trend Map’]

The result of Baidu’s crisis management in China

By being a resource for real-time information, the value of Baidu as an information portal has been highlighted. Since the coronavirus outbreak, over 1 billion people searched and read coronavirus related information through Baidu every day. As of March 20th, 651.6 million people had visited the “online diagnose” platform powered by Baidu health, and over 30 million people had consulted the platform. Therefore, recognized as a reliable information portal, the average daily active users of Baidu APP exceeded 20 million, a 10.4% growth compared with the same period in 2019.

JD.com – an opportunistic déjà vu

Just like nowadays, when the SARS virus swept through China in 2002-2003, it resulted in millions of workers isolating themselves in their homes. This phenomenon turned out to be pivotal for several now dominant e-commerce companies, such as JD.com.

The company was created in 1998 by Richard Liu, and initially sold magneto-optical products in the Zhongguancun High-Tech Industrial Park region of Beijing. By 2003, the company was thriving with 12 physical stores. However, the severe SARS outbreak threatened Jingdong’s future. Recognizing this as an opportunity to pivot the business, Liu quickly reconsidered his brick-and-mortar storefront and the possibilities for the same idea using an e-commerce model. The e-commerce platform became a big hit almost immediately, and JD.com was born.

The coronavirus outbreak hovers like a deja-vu for China’s biggest online retailer. Following a similar scheme as 15 years ago, JD.com is taking advantage of the epidemic to implement a based-on-innovative Coronavirus crisis management strategy.

Deliveries by drones and robots

It’s a unique opportunity for the company to soar above its competitors. JD reported its first successful delivery via drone in Hebei province on February 7th. The drone completed a delivery to a remote village, which delivery people used to reach with a boat, a route temporarily closed because of the outbreak. The day before, on February 6, JD’s autonomous delivery robot successfully made its first delivery to Wuhan Ninth Hospital, a designated hospital for the treatment of the novel coronavirus pneumonia in the epicenter of the outbreak. “JD autonomous delivery robots can help reduce human-to-human contact making them an ideal solution for last-mile delivery solution in Wuhan” said Qi Kong, Head of Autonomous Driving at JD Logistics

[Source: Freight Waves – JD’s drone completing delivery test]

Deliveries by drone and autonomous robots are not a brand-new service from JD.com, which already began daily operation in two test cities last year. These exploits, beyond its practical and beneficial effects to avoid contamination, are a part of a well-established communication strategy in China to exhibit the brand capabilities. The e-commerce company made videos of the two deliveries that are frequently shared on Chinese social media, as well as Twitter, LinkedIn, and Facebook.

Special measures for special deliveries

JD’s corporate website, Weibo and social media accounts detail other individual steps taken against the coronavirus. Like Baidu, the online player sometimes posts more than five times a day virus-related content on Weibo. Grateful to its delivery couriers, the company released the portraits of some of these ten thousand ‘heroes in red’ who were still working during the peak of the epidemic to meet consumer demand in China. Similar to Didi, the company stepped up the allocation of emergency materials for epidemic prevention, such as masks, thermometers, protective glasses and clothing, disinfectant, and a special insurance plan for its employees on the frontlines.

The Coronavirus crisis management of JD.com also welcomes AI as a powerful instrument to join the fight. On February 4, JD implemented its ‘smart epidemic assistant’ into the Wuhan Mayor’s Office WeChat account. The smart assistant, relying on AI capabilities, including semantic and syntax understanding, can automatically answer a wide range of questions from the Wuhan’s dwellers. Currently, it provides functions including epidemic self-screening, medical guidance, and even a way to inquire if a user’s flight or train had a coronavirus patient on it. Cloud and AI branches of the e-commerce giant also launched the ‘Emergency Resources Information Platform’ which provides municipal and medical institutions direct access to 3,000 online medical suppliers. As of February 4, the platform has performed the sourcing of more than 19 million protective face masks.

The result of JD.com’S crisis management in China

During the outbreak, JD.com made great contributions to ensure the stable operation of front-line assistance. Social responsibility and impressive logistics management allowed the brand to receive positive comments and obtain good reputation. For example, Dr. Zhong Nanshan – who discovered the SARS and is therefore widely recognized in China – wrote a thank-you note for JD’s “frontline medical assistance and urgent delivery of medical supplies to Wuhan.”

On March 2nd, JD.com published its 2019 Q4 financial report. After seeing the initial impact of the virus, JD.com still estimated an increase of more than 10% of the net income year-on-year in 2020 Q1. As JD.com continued increasing technology development, its anti-risk capabilities of the supply chain and logistics system have improved significantly.

Proper Coronavirus crisis management will improve brand awareness in China

Throughout the crisis, brands operating in China have demonstrated that they have a significant role to play in these times of public health challenges. Many of the brands have put robust measures to ensure the safety of their employees to ensure the business continuity – sometimes with great financial consequences. Overall, brands’ communication strategy in China show an understanding, caution, and optimism, which reflect trust in the future.

It’s precisely because there will be a future that brands, dare to innovate by engaging their core competencies in their China crisis strategies. Seizing crisis as an opportunity to show to the world that they not only have social duties, but also an increasing positive social impact. As China’s economic recovery from COVID-19 continues, it is now in the hands of other countries to figure out the best crisis management strategies.

Author: Maxime Bennehard

The ultimate Coronavirus economic impact in China report

Everything you need to know about the coronavirus by daxue consulting from Daxue Consulting

This article Coronavirus Crisis Management | Four brands that have done it right is the first one to appear on Daxue Consulting - Market Research China.