China has been the world’s largest automotive market for years. That is why carmakers around the world are fighting to sell their cars to Chinese consumers. However, in a market mainly dominated by Chinese brands (42%), what are the trends and growth drivers that international carmakers can follow?

The automotive sector is one of the top pillar industries for China’s economy and a major employer. In 2019, for example, the automotive sector contributed 9.6% of the total retail sales of consumer goods. The sector also accounted for around 10% of total employment in China.

COVID-19 impact on the automotive industry in China: decline in sales

COVID-19 placed significant burdens on the automotive industry in China. Hubei Province where the outbreak started, accounting for about 9% of the country’s auto production. Wuhan, Hubei, as one of the key development cities of the country’s six major automobile industrial clusters, not only gathers many vehicle manufacturers, but also has more than 500 automobile parts enterprises.

The auto industry is especially facing major challenges both on supply and demand side—new passenger car sales in the Chinese market slumped by over 80 percent in February 2020. Forecast shows that China’s automotive market will decline 15.5% in 2020.

Data Source: Statista, PwC, China’s auto market size

China’s first quarter vehicle sales saw the biggest impact. According to the China Association of Automobile Manufacturers, sales of passenger cars declined 42.4% year over year during that period. SAIC, one of China’s largest manufacturers, reported a 44.9% percent drop year to date in April. Its SAIC-Volkswagen and SAIC-General Motors joint ventures, dropped 50.4% and 47.7% year over year in retail sales from January to April respectively.

Government policies to help the automotive industry in China

To stimulate the automotive market, government launched some policies. 10 cities released incentive schemes. For instance, Guangzhou announced a subsidy of 10,000 RMB for New Energy Vehicles sold between March and December. Additionally, a State-level subsidy to New Energy Vehicles was extended until 2022.

Epidemic highlighted imbalance of car brands in the Chinese market

The epidemic has exacerbated the imbalance between the various car brands. From January to March 2020, the total sales volume of the top ten enterprise groups was 3.295 million units. It had a year-on-year decrease of 41.7%, which was 0.7 percentage points lower than the industry decline. It accounts for 89.7% of total car sales, which is 1.1 percentage points higher than the same period last year. This shows that under the impact of the epidemic, the market share of small brands has shrunk even more.

A phenomenon worth noting is that compared with last month, the sales of major foreign brands also showed a rapid growth, of which the growth rate of Korean brands is particularly significant.

COVID-19 boosted electric cars market

China’s reaction to the crisis shows a commitment to new technologies, signaling how the crisis could build resiliencies moving forward. The real opportunity after COVID-19 lies in the shift from internal combustion engines to cleaner, electric vehicles in China. China is set to keep its long-term strategic goals for automobile electrification and meet climate change goals set by the Paris Agreement.

In March 2020, the production and sales of electric vehicles were also significantly better than that of the previous month. The growth rate was rapid and the year-on-year decline was narrower than that in February. For example, electric car maker Wei Lai released the delivery data for March 2020. The delivery volume reached 1533 units, an increase of 11.7% year-on-year and an increase of 116.8% month-on-month.

The auto industry in China slowly rebounds back

On February 2020, due to China’s recovery from the coronavirus outbreak, car companies ushered in the first wave of resumption of work. They include Geely Automobile, Great Wall Motor, Changan Automobile, Xiaopeng Automobile, Weilai Automobile, Tesla Shanghai Super Factory and so on. The outbreak of the epidemic has also made car companies pay more attention to the online car sales model. Many brands have launched online car purchase activities during the epidemic, thereby stimulating consumers’ desire to consume.

In March 2020, as the industry’s orderly resumption of production, the monthly production and sales volume rebounded significantly, but still did not reach sales level of 2019.

Data Source: China Association of Automobile Manufacturers (CAAM), China car sales 2019/2020

Retail sales of light passenger vehicles also surged ahead in March, as reported by the China Passenger Car Association. Year over year, March 2020 sales were still below 2019 levels, but 26%, not the 80% drop seen in February. Sales in April 2020 have begun to catch up with just a 2% drop year over year.

Automotive brands show signs of recovery

From the perspective of different brands, Changan Automobile sales reached 119,000 in April 2020, an increase of 32% year-on-year, ranking first. In April, the company achieved sales of 105,400 units, an increase of 44% month-on-month and 2% year-on-year. Great Wall Motor sold a total of 81,000 new cars in April, an increase of 35% month-on-month.

Chery Automobile increased by 15% month-on-month in April 2020, but continued to show negative growth year-on-year. 

Volkswagen’s China terminal sales in April 2020 were 16.57 units, an increase of 9.9% year-on-year and an increase of 41% month-on-month.

Weilai (also known as NIO) delivered 1,533 vehicles in March 2020, an increase of 117% QoQ.

Data Source: China Automobile Association, Weilai sales January-March 2020

Therefore, key automotive brands show the signs of recovery, however this process will take time.

In 2020, mainstream automakers supposed to have many new models launched on the market. However, due to the impact of the coronavirus epidemic, it is difficult to carry out offline listing activities such as test drive, auto show, and press conference.

Data Source: China Automobile Center, Summary of originally planned models to be launched in the first quarter of 2020

Chinese auto industry still has big potential

Despite the significant impact of COVID-19 on China’s automotive industry, the market potential is still quite huge. China is still expected to become the largest vehicle market with around 260 million units in operation. At 173 units per person now, there is room in China for more light passenger vehicle purchases.

However, after COVID-19, the market will definitely not simply snap back to where it was before the pandemic. According to a forecast from IHS Markit , light vehicle sales will decline 15.5% in China for 2020.

Why 2018 was a turning point for car manufacturers in China?

For the first time in twenty years, sales in the automotive industry in China are declining

In 2018, for the first time in 20 years, China saw its new car sales decline by 2.8%. In 2017, 28.88 million cars were sold in China compared to only 28.08 million in 2018.

Sales in most provinces of the China declined in 2018 except Guangdong, which saw an increase of 5.3% compared to last year, which can easily be explained by the rapid development of the local economy (Guangdong has had the highest GDP for 29 years in China).

Despite this decline, China remains the world’s largest automotive market, accounting for about 30% of total global car sales in 2018. Compared to the 28 million cars sold in China in 2018, only 5.2 million cars were sold in Japan, 16.5 million in Europe and 17 million in the United States in 2018.

But then what explains this decline in car sales in China?

Alternatives to cars are increasingly successful in China

One of the main reasons for the decline in car sales in China in 2018 is that there are many relevant alternatives. Chinese car shoppers are increasingly value minded and open to the alternatives to buying new cars. Moreover, the younger generation of Chinese is increasingly sensitive to environmental issues and tend to consider more environmentally friendly options.

In recent years, car-hailing apps have been gaining popularity in China. By the end of 2018, there were more than 100 car-hailing platforms in China, and the total number of car-hailing app users has exceeded 330 million.

This is the success of car sharing apps such as Didi Chuxing or bicycle sharing apps such as Mobike, which have seen their number of users increase in recent years:

Didi Chuxing

Didi is now one of the main alternatives to owning cars in China.

The business model of this Chinese transportation network company can be compared to Uber’s model. The cost of fares is very low and the simplicity of the service, easily ordering a fare on the app, make China gradually becoming the largest ride-hailing market in the world, with a value of US$30 billion.

In 2018, Didi held more than 80% of China’s ridesharing market.

Mobike

Mobike, a fully station-less bicycle sharing company in China, also offers a great alternative to private cars in China, especially in big cities.

Bikes are often used to connect to buses and subway stations, what we can call intermodality. For example, in Shanghai, approximately 1 in 5 users take bikes to make subway and bus connections (Mobike, 2018).

Thus China has now become the leading country both in terms of ride sharing and bike sharing in 2018, and this can be bad news for car manufacturers in China.

Second-hand car market shows growth in China

The Chinese craze for used cars is also an essential reason for the decline in car sales in China in 2018.

In 2018, second-hand car sales in China rise with a growth of 11.5%. Sales are even expected to reach over 20 million in 2019.

As consumers prioritize value for money, they become more price conscious and lose confidence with spending. Online marketplaces for second-hand cars, like Renrenche (人人车), Uxin (优信) or Guazi (瓜子), are also developing fast and allow customers to find the best price quickly without having to visit multiple brick and mortar shops.

Despite this, consumers continue to buy private cars in China, whether for practical reasons or for pleasure. According to the graph below, 58% of them buy a car to travel comfortably on holidays. Driving has been a very popular way of travel (average 300km) in China. In Tier-3 and Tier-4 cities, the school bus hasn’t been very popular, so many parents also need safe and convenient transportation for their children.

New-energy vehicles in China have become very trendy

Electric cars sales are increasing

Electric or hybrid cars have been very successful in recent years in China, thanks in particular to the support of the Chinese government but also because buying an electric vehicle avoids the cost of purchasing a license plate, which is a considerable saving.

In 2018, the sales of new energy vehicles in China consistently grew reaching 1,25 million units sold.

Buyers of new energy cars in China are mostly urban and young: 40% of China’s electric car sales in 2018 came from 6 large Chinese cities which are Beijing, Shanghai, Shenzhen, Tianjin, Hangzhou, and Guangzhou because of the awareness of the pollution problems inherent to combustion vehicles and the gasoline-car restrictions that have been implemented in these cities. Most of them are also the first person in their family ever to own a car.

China’s biggest electric carmaker: BYD

BYD Company Limited was China’s top-selling electronic car manufacturer in China in 2018. Created in Shenzen in 2003, the brand launched its first electric car model, the E6, in 2011.

In 2018 BYD sold a total of 520,687 cars in China including 247,811 electric vehicles, achieving a year-on-year jump of 25%.

The best-selling BYD model in China in 2018 is the Song, 91,426 units sold, for an average price of $28,000.

BYD’s marketing strategy in China is to develop a flexible and segmented offer to reach a wider audience: BYD then decided to go on all-in on hybrid rather than pure electric with one of its model, ‘Qin.’ It is a more flexible option for consumers, who can drive it as an electric car for their daily commute and reach much farther distance without having to worry about charging.

Thanks to its various plants in China the company also has a competitive advantage to integrate all of the key components in-house. And with the help of subsidies, BYD has been able to build economies of scale, pushing down their cost per unit and allowing them to spend more on research and development.

High-connectivity: Cars in China have to be mobile-first

Connected vehicles in China have to be mobile-first

A connected car is a vehicle connected to the Internet through its communication system. It allows the driver to connect his smartphone to the car, but also the car itself to connect to the surrounding cars and infrastructure.

Since China is a mobile-centric nation with mobile commerce representing a quarter of the country’s overall retail market ($1.5 trillion in sales in 2019), it is normal to find this requirement in the 2018 car trends in China.

Thus the global connected-car market in China is expected to grow 270% by 2022 and 41 million people will make use of in-car connectivity by 2021.

According to a 2017 Kantar TNS study, 79% of Chinese respondents plan to buy a connected car in the future, compared to about 50% for Americans and Europeans.

According to Jack Ma, Alibaba’s chairman, there is no doubt that the future of cars in China is high-connectivity:

‘’Today, 80% of your smartphone’s functions are not relevant to making phone calls or conversation. I believe that in the future, a car will have 80% of its functions not related to just transportation.’’

But Chinese consumers are more and more difficult to please in terms of connectivity services; they are seeking innovative in-car services and are even ready to pay subscriptions for content.

Which is why automakers and tech giants are all racing peers to new tech horizons!

Integration of Alibaba’s Tmall Genie in BMW vehicles

The partnership between BMW and Alibaba is an excellent example: Alibaba Group’s smart assistant, Tmall Genie, will launch in select vehicles from the BMW Group in China by the end of the year.

Tmall Genie will be fully integrated into BMW vehicles, offering drivers several entertainment and shopping options in the car. Drivers will be able to use Tmall Genie to buy online, watch movies, listen to music, check the weather or make appointments appointments in BMW.

Top innovative car brands in China

Volkswagen in China has delivered its 30 millionth car to Chinese customers

For the company which connection with China started in 1978, 2018 was a real milestone. They achieve sales record with 4.21 million vehicles delivered to customers in China including 196,300 imported cars, which corresponds to a + 0.5 % evolution compared to 2017.

The best-selling Volkswagen model in China is the Lavida with 504 000 units sold in 2018, a 4-door sedan which has been sold exclusively in China since 2008. Depending on the generation, its price is between 110,000 RMB and 160,000 RMB.

Because Volkswagen was the first foreign car manufacturer in China, it can now compete directly with Chinese competitors. And the brand’s communication strategy is really to emphasize this authenticity and improves its reliable brand image.

To do that, SAIC Shanghai Volkswagen wants to show how close to Chinese consumers it is.  At the end of 2018, a campaign announcing the launch of new models then revealed a desire to align the brand’s image with China’s powerful economic growth:

The timing of the publication, that was the 40th anniversary of the policy of openness and reform, was ideal.

To attract the growing target group of young, middle-class customers, Volkswagen also decided to launch JETTA as a brand in February 2019 (it was only a Volkswagen model before). The idea is to target first-time buyers, who account for 81% of the customers in the entry segment, by offering high quality, safety, stable value, and fresh design. In 2018, the brand also announced the launch of the SOL brand in partnership with the Chinese auto manufacturer Anhui Jianghuai Automobile, whose first model is an electric SUV.

Geely in China: ‘’Making Refined Cars for Everyone’’

Geely enters the automotive industry in China in 1997 and is now among the 500 largest companies in China. In 2010 Geely group bought the Swedish carmaker Volvo.

In 2018 Geely sold 1,500,838 units in China, an increase of 20.3% from 2017 and had a 6.9% market share.

The brand has a very young customer base with 51% of customers born in the 1990sor later, it’s a new generation of young innovative consumers who have a global vision and a global mindset. Thus, Geely communicates on high connectivity and ultra-modern design to directly target this audience. They often highlight their design teams and the famous designer Peter Horbury they work with to show their modernism.

The best-selling Geely model is the Bo Yue, a compact crossover SUV with 255 695 cars sold in China in 2018.

Geely is now trying to expand internationally by developing its battery manufacturing business with CATL Geely Power Battery Co. Ltd and acquiring new foreign brands like Proton’s Norwich-based subsidiary Lotus or Daimler recently. The brand also invests heavily in new energies cars with its ambitious project Blue Geely, wanting 90% of its sales to be consist of Evs in 2020.

Landrover in China: designing ‘’China SUV of the Year’’

Jaguar Land Rover entered the Chinese automobile market in 2010 and has witnessed exponential growth each year until 2018. A total of 492,388 Jaguar Land Rover units were sold in China in 2018.

Land Rover’s strategy in China is to demonstrate a commitment to the Chinese market by offering unique designs and models that meet consumer requirements and preferences. That is why in 2012, JLR entered a joint venture with Chery Automobile Company to manufacture Range Rovers to build vehicles designed specifically for the Chinese market (Jaguar XFL and XEL are good examples). Thanks to this, Land Rover in China has won numerous awards that allow it to raise brand awareness:  recipient of the 2018 ‘China Reputation Award’ for the second time, Range Rover Velar wins ‘China SUV of the Year’ and ‘China Car Design of the Year.’

How do carmakers promote their cars in China?

Offline promotion: How to keep a substantial brick and mortar presence for car manufacturers in China

Offline promotion remains very important in the automotive industry in China today. Indeed, despite the development of the massive development of e-commerce and m-commerce in China, nearly 90% of car purchases were made at 4S stores in 2018. This means that Chinese consumers still appreciate contact with sellers and want to be able to go to offline stores to get information and buy a car.

• 4S stores in China

4S stores are today the most popular distribution channels for the vehicle brands in China. There are more than 28,000 4S stores in China. They have dominated the offline purchase channels in tier-1, tier-2, and tier-3 cities; now they are expanding to tier-4, tier-5 cities and rural areas.

Consumers choose 4S stores as they provide all in one service: ‘‘4S’’ means Sale,  Spare part, Service and Survey. So, they cover all business related to vehicles such as sales (new cars and second-hand cars), maintenance, car wash, auto finance, car rental, etc.

It is also interesting to note that the competition among 4S stores is increasing, trying to fight on price, discount activities, test-drive services and insurance.

• Exhibitions, events, and shows: the entertainment marketing strategy

There are more and more events and exhibitions in China that attract millions of people each year. For instance, Auto Shanghai, the Shanghai Motor Show which has made its mark among international shows, host every two years more than 900,000 visitors from 18 countries. The 2019 edition is currently being held (April 23-28).

Automotive shows are an excellent way to stand out from the competition and showcase its best models to demonstrate the brand’s research and development capabilities.

Despite their international scope, the domestic players are most active at these shows with more than 70% of new products produced by Chinese carmakers.

• Showrooms, storefronts and flagship stores

Car manufacturers in China are now investing more and more in showrooms in major cities to impress consumers: stores are no longer just places to buy cars but luxury spaces to live a real experience.

In 2018 NIO invested CNY80 million (USD11.7 million) in a store in the iconic Shanghai tower and paid more than CNY100 million annual rent.

The brand also pays a yearly rent of about CNY80 million for a shop in Beijing’s Oriental Plaza mall.

Online promotion: Using KOLS and social media to boost your sales in China

In China, websites and social media are dominating the promotion channels for vehicle brands in 2018.

With a perfect online service layout, automotive E-commerce platforms have real marketing advantages. Automotive E-commerce represented by Youxin, Emao, and Taobao makes full use of the business sector (new cars, used cars and auto finance). They are user-centric, E-commerce data-based, product and service innovation-oriented, aiming at creating a  full life cycle Eco-marketing platform. It is a good source of information before buying a car in China.

Also, almost half of consumers obtain information about cars from automotive websites, since those websites usually have comprehensive knowledge about car brands and models.

On social media, young auto enthusiasts (post-90s and younger) have a stronger willingness to share content about vehicles with others. Half of the auto enthusiasts spend 5-15 minutes on every online post (website and social media) about vehicles.

Social networks have therefore become strategic for car promotion in China. This is why many brands now use KOLs (Key Opinion Leaders) to convey messages in a more subtle way. Indeed, more than 70% of vehicle consumers follow at least three KOLs, their purchasing behaviors are highly influenced by KOLs’ opinions and experience.

New retail: How the Alibaba strategy applies to the Chinese automotive market

New retail in the automotive market in China is more consumer-centric.  This is a trend that has been widely followed by car manufacturers since the success of Alibaba’s New Retail strategy launched in 2016.

By collecting consumers’ data (such as interests, price and design preferences), vehicle brands are able to provide cars, auto-configuration and services based on consumers’ requests. Thus, the consumer’s journey is shorter because the touch points are blended: for example, Wechat content is now a touch point for each step of the car buyer journey in China.

This is the strategy that Ford decided to implement in partnership with Alibaba: they launched the Super Test-Drive Center in Guangzhou to allow people to buy a car from a staff-less machine in under 10 minutes.

Customers just have to go to the Tmall app and choose the model they want to test-drive via the online catalog. To register, customers must take a picture of their face and once in the store, once the customer shows their face to facial recognition,the car chosen online arrives from the multistory structure. Then, the customer can test the car for a few days (3 days max) and order it online.

How could international carmakers improve their marketing strategy in the Chinese market?

Target a young audience

New cars buyers in China are young and connected consumers. As they gain purchasing power, they are the future of the Chinese automotive market.

Do not neglect offline communication channels

The paradox of the explosion of e-commerce in China is that buyers are still demanding physical presence or human contact. Thus, offline channels must be up to the task.

Keep a close eye on your online reputation

Control your reviews and comments and opt for an influence marketing strategy because brand reputation plays a vital role in the buying cycle of a car in China.

Rely on well-made design

Content and design provide an important first step in customer experience in China in 2019: work on a modern and sophisticated design for your website, your products, and your communication.

Leverage to e-commerce and new retail

For automakers, innovation linked to the e-commerce platforms and deepening relationships with end users will be key to benefit from the increasingly technology-enabled car market in China.

Author: Steffi Noël

Daxue Consulting offers further analysis of the automotive market in China with a forward-thinking approach to topics such as digitization, high-tech implementation, artificial intelligence, and many others. To know more about the evolution of the automotive industry in China, do not hesitate to contact our project managers at dx@daxueconsulting.com.

This article Automotive industry in China: How carmakers compete for first place is the first one to appear on Daxue Consulting - Market Research China.

China’s startup hype started from the central government

Entrepreneurship and innovation have always been on the mind of top decision makers

Since 2008, China’s central government has already extended a warm welcome (in the form of grants and other perks) to attract top talents back to China. Its goal is to promote high-level innovations and technological breakthroughs, which naturally contributes to employment and economy.

In 2014 in the Summer Davos Forum, the Prime Minister Li Keqiang first coined the term “Mass Entrepreneurship and Innovation”. In 2015, he kept advocating the entrepreneur spirit in the National People’s Congress and many other important occasions. Since then, the notion of starting up and being your own boss gained momentum.

Over the years, the Chinese government has focused on the youth as the main propeller of innovation

The plan called “Implementing Opinions on Deepening Innovation and Entrepreneurship Education Reform in Higher Education Institutions” issued by the State Council in 2015 further lowered the entry barriers for university graduates to start a business. All sorts of business plan competitions were put in place with generous grants to realize the winning proposals. For example, China College students’ Internet Plus Competitions are target local graduate students, while the Chunhui Cup targets overseas students. Also, startup experiences could be converted into school credits. What’s more, university entrepreneurs can extend their school years if they decide to pursue a business idea.

All those measures were established to reach the objective in 2020: a sound university entrepreneurship education system, significantly enhanced students’ innovative spirit and skills, and a significant increase in the number of students engaged in entrepreneurial practices.

Internet is transforming almost all the industries, representing great opportunity for mass innovation

The term “Internet Plus” was coined to inspire people with the prowess of information technology, and is regarded as a national-level strategy. All the aspiring entrepreneurs in China’s startup scene are thinking how to disrupt a traditional industry with the mighty internet.

Online to Offline (O2O) is a famous term born in this context. The logic is to combine the online and offline experience to facilitate life. Ride-hailing market leader Didi, food delivery platform Eleme, e-commerce giant Taobao, short-lived bike-sharing unicorn OFO are all examples of the O2O business model. The customer value chain has one part done online, usually product configuration and mobile payment, and another part delivered offline.

In addition to O2O business model, Internet Plus also gave birth to new business models in various industries. Coupled with media, it became new media, embodied by WeChat official accounts. Married with finance, it turned into FinTech, which made investing, money wiring, and short-term renting way more convenient. E-commerce is the best illustration of how internet switched the retail business online and scaled up its influence while cutting down fixed costs.

The benefit of internet spills over to non-for-profit areas too. For example, online education market leader Hujiang put forward a Corporate Social Responsibility program in 2015, with an aim to mitigate the education inequality in China. Ant Forest, a carbon-reduction program introduced by Alipay increased user stickiness by planting real trees on their behalf.

The mobilized public and the honorable badge of failure

The unwavering support from the government and the widespread of internet capabilities enabled the creative minds to unleash their potential.

According to National Bureau of Statistics, the improvement of general business environment in China has given rise to business registrations. Especially in the tertiary sector, where the legal entities registered with IT services has quadrupled from 2013 to 2018. Other booming industries include technological services, leasing and professional services, with a CAGR of 23%. Public administration and social organizations only grew 2% on an annual basis. Those figures clearly outline the confidence and concentration of digital services promoted in the entrepreneurial wave.

Data source: National Bureau of Statistics, Number of Chinese legal entities in 3 sectors

The increased ease of starting up and technological advancements propelled the establishment of enterprises. Compared to individual economic units, registered enterprises soared in 5 years, taking a whopping 75.6% of total legal entities.

Data source: National Bureau of Statistics, Number of Chinese enterprises registered has soared

Furthermore, the tide of Mass Entrepreneurship and Innovation translated into the numerous young enterprises. In 2013, SME (small and medium enterprises) represented 95.6% of the total registered companies. In 2018, they represented 98.5%, showing the liveliness of Chinese entrepreneurial energies.

Data source: National Bureau of Statistics, Young enterprises take the lead

There are many stories and lessons about startup failures, which is how 95% of startups end. But with the mainstream endorsement and regulatory privileges, failures are more and more seen as a badge of honor. For the new generation of Chinese entrepreneurs, many are driven by dreams and opportunities, some are forced to venture for lack of job prospects, yet others are blindly following suit. In 2011, only 1.7% of university graduates opted for starting up a business. This percentage peaked at 3% in 2016 then slightly dropped to 2.7% in 2018. This change implies that government promotion was effective, and that China’s startup scene is cooler headed than before.

On the one hand, it’s the government’s job to put all the necessary support in place to ensure new ideas come out alive after market selection. There are more and more incubators, governmental subsidies, and free startup resources and mentors. On the other hand, it’s entrepreneurs’ job to hone their entrepreneurial skills and think long and hard about their fundamental business logic.

The fallen unicorns made investors more cautious about the fundamental business logic

After the two roles played by the government and the entrepreneurs, the third player in China’s startup scene is the investors. Whether it’s business angels or venture capitalists or private equity firms, they are the guardians of solid business sense and financial resources.

The loudest failure in the recent history of China’s startup scene is the bike-sharing platforms. Began in 2014, OFO and Mobike had been the super stars to solve the last mile mobility issue. Even with around 8 billion RMB of investment across several rounds for each company, they had been controversial in their ability to generate profit, to respect public order, and to protect local environment. In the end, OFO filed for bankruptcy and Mobile got acquired by Meituan for merely 2.7 billion RMB.

This contrast of capital zeal and the market failure illustrate the short-term mindset of some investors. To claim the maximum market coverage, which seemed to be the key success factor in the sharing economy logic, the companies and the capital both prioritized buying bikes over risk control. The lack of a sustainable company culture and conflicts of interest at the top management level went unaddressed.

Source: Sina Finance, the mountain of abandoned sharing bikes

Such a vivid example will lead the investors to favor sound business models over those benefiting from over-evaluations of other investors. It’s good for the society because it creates less bubbles, but it also means tougher financing for the entrepreneurs. For any newcomer in China’s startup scene, there are several dangers that could be detrimental to its fundamental business logic.

Competition and acquisition from conglomerates like BATJ

It’s almost a common knowledge that once a startup is big enough, it will be bought by one of the tech giants in China. The famous Baidu, Alibaba, Tencent, JD and other rising giants like ByteDance, NetEase, Didi, Meituan won’t hesitate to make a bid to make their own ecosystems stronger.

But first of all, the startup has to survive the competition by those giants. A great dark-horse example is Pinduoduo, whose founder Colin Huang recently became the second richest person in China. The notion of Social + Ecommerce in the long tail market made this startup successful, in an era where everyone thought Alibaba and JD had occupied all the room of growth. In theory, the existing e-commerce giants could quickly take over Pinduoduo in its cradle. In practice, neither of them followed the startup to compete in lower-tier cities.

Tencent, being the social networking giant, strategically invested in both JD and Pinduoduo, to combat with Alibaba in the e-commerce arena. That’s the best outcome for the startup, with the owner taking 46.8% of the shares and 89.8% of the voting rights.

Other startups don’t have the same luck, many were bought to be dissembled into existing projects of the giant company. For example, ByteDance bought Zhaoxi Calendar, a niche time-management app, whose product team was integrated into Lark, another acquisition realized only 2 month before.

Copycats and price war

Even if a startup didn’t make enemies out of the tech giants, diligent copycats and the resulting price war could put an end to their cash inflow.

The Chinese market never lack duets. Didi and Uber China in ride-railing sector, Meituan and Eleme in food delivery online business, Mobike and OFO in bike sharing economy. When there is oligopolistic competition, the consumers are the happiest. Huge amounts of discounts are up for the taking, as long as they lead to market share. However, price wars are destructive to both competitors, as the customers attracted by low price are not necessarily loyal. Once the price incentives are out of the table, usually due to the serious drain on financial resources, the market share might shrink back.

One sure thing to note about China’s startup scene is that, there is no shortage of copycats. Demonstrating this, there are more than 20 startups which share the same shared-bike business model.

Source: Tencent news, Shu Ke Shi, 20 startups in bike sharing industry

Illegal activities that suck the margin into the shadow

Luckin coffee has made its fame by publicly stating financial fraud to SEC. Its business model was clearly unsustainable, as it had a loophole in its expansion strategy. It’s strength in marketing and storytelling did not compensate its unsatisfactory risk control department. And this Achilles’ heel has costed its healthy financial performance.

Basically, Luckin’s expansion strategy is based on customer referral. As a startup, the number of referrals is directly linked with GMV, KPI, and valuation of next financing round. It’s therefore understandable how much marketing and budgetary resources are pooled to facilitate leads conversion. However, instead of using elaborative verification methods to ensure the referred customer is a real person, Luckin only used a phone number to validate the referral. Once the referral is validated, both the referrer and the referee enjoy discounts. The result of a weak risk control is constant loss of profit due to a highly developed grey industry of fake phone numbers.

In the highly competitive battlefield as the China’s startup scene, nothing is too despicable to be true. Entrepreneurs owe it to their teams and investors to pay attention to not only the legal competitions, but also illegal activities.

In conclusion, China’s entrepreneurs keep pushing forward despite setbacks

China’s startup scene is quite lively thanks to the government’s Mass Entrepreneurship and Innovation guidelines, mobilized public and responsible investors. Even though system-level crises, industry-level fluctuations, and company-level setbacks keep striking one after another, the qualified entrepreneurs will seize the opportunity in the distressing time, fearless as always.

Author: Della Wang

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Industry overview of the home decor market in China

[Data source: qianzhan.com, “Size of home decor market in China”]

The home decor market in China shows a steady upward trend and is gradually entering  a more mature stage. The size of the Chinese home decor market has exceeded 2 trillion yuan. It is predicted that the market size will reach 2.59 trillion yuan by 2020, maintaining a compound annual growth rate of about 7%. Since the reform in 1998, the Chinese home decor market has experienced the stages of concept initiation, policy reform, and standard-setting. The State Council of China released “the Guiding Opinions on Actively Promoting the ‘Internet Plus’ Action Plan” in July 2015. The home decor industry vigorously responded to the policy on “Internet Plus” transform and upgrade. Currently, the home decor market in China is still mainly driven by new apartment owners. However, with the continuous development of China’s urbanization process, the demand for renovating old homes is increasing in recent years, especially in first-tier cities.

Consumer demographics of the Chinese home decor marketChinese home decor’s primary customers consist of men and women born in the 80s (33%) and 90s (27%). 87% of customers born in the 80s are married and have children, while 65% of customers born in the 90s are unmarried. According to a survey, customers born in the 70s and 80s prefer practical and eco-friendly decorated homes while the younger pay more attention to smart home and personalized trendy decorations. For all age distribution of customers, a simple, clean and practical home is at the top of the list.

Information customers care about while decorating their home

Budget, decoration style, experience from others, environmental indicators, furniture style and brand are the top 5 elements that people most concern in the process of home decoration. For overall style, around a quarter of customers like modern minimalist or ‘Nordic simplicity’ style, known as beiou fengge (北欧风格) in Chinese . At the same time, over 20% of people don’t have a specific pursuit of style. People lay great emphasis on healthy and eco-friendly home decor products, and this is reflected in that they will seek information about environmental indicators, considering the safety of decoration materials and ensuring the health and environmental protection during construction. In addition, more and more people pay attention to smart home and high-tech elements of electrical appliances. 

Customized home decoration products are increasingly welcomed

In a wave of consumption upgrade, customized home decoration products are more and more welcomed in the Chinese home decor market. As shown in a survey, over 70% of people will choose customized productions during the whole process of home decoration. 55% of researched consumers state that they want partially customized home furniture, while 17% of them choose a whole-house customized solution. Besides the advantage of saving time and cohesive style, a whole-house solution can make the home look more high-end and custom-made. Although still at an early stage of development, such a solution is more prevalent in people born in the 70s and people who lived in first-tier cities. 

Elements of choosing home decoration companies in China

Reputation, customer services, the quality of materials, and price-performance ratio are the core elements that consumers will take account of when selecting home decoration companies in China. Customers in the Chinese home decor market are more rational, and people will also consider the various aspects of home improvement companies like whether the products are eco-friendly, whether the designs are reasonable, etc.   However, there is a lot of negative feedback toward home decoration companies in China. According to a survey, consumers are unsatisfied or concern with the home improvement companies in the following contents: the quality of materials and work, extra charge, hidden contract traps, construction delay.  

The rise of the Chinese e-commerce home-decorating market

[Data Source: 2019 Tencent market research and industry analysis, “The type of decoration company used in the process of home decoration”]

Although the traditional home-decorating is still the mainstream, the Chinese e-commerce home-decorating market is booming. Among the total consumers surveyed, 77% of them choose the traditional home decoration, while 9% of them choose e-commerce home decoration, and the rest of them adopt two types of decoration more or less evenly. Nevertheless, it seems that e-commerce home decoration is more favored by people born in the 90s and people who live in first-tier cites.    Consumers list convenient purchasing experience, high price-performance ratio, many varieties, discounts and home delivery as top 5 advantages of Chinese e-commerce home-decorating. And the primary cons are poor information transparency, bad after-sale service and non-guaranteed quality of materials.

High acceptance of advertisements for home decoration

Due to the demand for information, home improvement advertisements are generally accepted by Chinese consumers. In a survey question about the response of online ads for home improvement, around half of people who are in demand of decorating home state that they will read the ads and look through the introduction of products, while over 30% of them will click the link and favorite the ads page. For the online advertising channels, ads on digital social medial are most popular, and over 30% of people can accept ads in WeChat moments, WeChat public accounts, news APPs like Tencent News and Toutiao (TopBuzz) and short-video APPs like Tencent Video and Tiktok. So, in order to reach their target customers, merchants can take advantage of multiple channels to advertise.  

Promotion strategy of home decoration companies in China

With the trend that millennials are becoming the primary consumers, home decoration companies and suppliers should know and understand the needs of these customers to win the market. Tips for marketing to millennial home-owners First, based on consumer insight, build segmentation strategies targeted at different customer groups. Those with family may be more concerned about safety, while those in high-tier cities may be more concerned with appearance. Second, monitor and optimize the outcome of ad serving by leveraging the power of digital platforms.Third, integrate online and offline channels to promote effectively. Most millenials are avid users of social media platforms like WeChat.  Last, focus on new core demand like decoration style, eco-protection, smart home and price-performance ratio to satisfy the needs of different customer segmentation.

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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

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Overview of the cooking oil market in China

Revenue of the cooking oil market in China: Growth is slowing

According to IBISWorld, as the country has changed its economic focus from exports to domestic demand and increased living standards, consumption of cooking oil in China is expected to maintain a strong growth trend over the period. The revenue of the cooking oil market in China is growing 4.4% YOY. Over the past five years, revenue has risen at an annual 5.1%, meaning revenue will be over 260 billion USD in 2020.

In the upcoming 5 years until 2024, total industry revenue is expected to increase at an annual 3.8% and reach 301.9 billion USD. Due to the over-production of cooking oil in the previous five-year period, the revenue growth in the following years is forecasted to be slow. The main drivers of industry revenue growth over the five years through 2024 are expected to be the gradually growing demand from catering industries and the food sector. Further popularization of small-package cooking oil, rising global demand for biological diesel oil and competitive pricing levels are also projected to facilitate the industry revenue growth over the period.

Import pattern in China’s cooking oil market: dominated by Indonesia and palm oil

The imported volume has been fluctuating

According to IBISWorld, in 2018, the liquid palm oil was the main imported product in China’s cooking oil market. Followed by soybean oil and rapeseed oil. These are mainly imported from Southeast Asia and South America. Palm oil is an entirely imported product. In 2018, imports decreased by 1.6% to 8.3 billion USD in comparison with the previous year.

The major import partners in China’s cooking oil market were Indonesia, Malaysia and Ukraine, in total they accounted for 72.4% of total imports in 2018.

The Chinese government canceled import quotas of soybean oil, palm oil and rapeseed oil. Instead, it implemented a general tariff rate of 9% on January 1, 2006, which affected the import significantly.

The imported volume in China’s cooking oil market had experienced fluctuation from 2013-2018. In 2013, the imported volume was 8.1 million tons. Afterwards, it decreased gradually to 5.77 million tons in 2017. In 2018, there was a slight increase and the imported volume reached 6.29 million tons.

Chinese soy bean oil production is decreasing

Here comes the crucial time for Chinese cooking oil market as the production quantity of soybeans in Heilongjiang province is getting smaller and smaller, with a 90% decrease between 2006 and 2012. It is reported that over 7 tenths of soybeans are imported compared with high consumption. Statistics show that from January to September in 2005 China imported 1.953 million tons of beans and during the corresponding period in 2011 we did 3.771 million tons. Meanwhile the four big granary, AMD(Archer Daniels Midland), Bunge, Cargill  and Louis Dreyfus known as ABCD have the say. However, soy bean oil is still the most consumed cooking oil in China.

Products in China’s cooking oil market: dominated by soybean oil

Dishes baked or fried in cooking oil are welcomed guests on the tables of Chinese families for all meals in all regions.  Chinese people are used to eating vegetable or animal fat and believe they make food more delicious. In the western world, people like eating with palm oil and olive oil, while in China most citizens prefer soybean oil and peanut oil for these raw materials are quite accessible in Mainland of China. Soybeans grow in the north eastern China. Shandong Province, in the North China Plain, is the most appropriate and economical field for peanuts. 

What cooking oils do Chinese use?

The cooking oil market in China is comprised of animal oil and vegetable oil the latter one dominate the market.

Soybean oil

The largest industry segment is soybean oil, accounting for nearly half of total industry output. According to IBIS World, faster growth in the consumption of soybean oil in recent years has led to increasing production of soybean oil in the cooking oil market in China.

Rapeseed oil

Rapeseed oil makes up the second-largest segment with 23% of total industry output. According to IBIS World, production of Rapeseed oil in China mainly depend on domestic rapeseed supply, which has been relatively stable in recent years. Owing to a shortage in domestic supply caused by the ongoing low price of rapeseeds, rapeseed oil imports surged in 2007 by more than seven times.

Peanut oil

Peanut oil accounts for 8% of industry output in 2016. According to IBIS World, raw materials for peanut oil mainly depend on domestic peanut supplies. As the planting area of peanuts is limited in China, and the utilization proportion of peanuts for oil crushing is stable (between 60.0% and 65.0%), output of peanut oil is expected to remain stable in future years.

Palm oil

Despite the cheap price and wide application of palm oil, which created growing market demand, China does not produce palm oil.

Production and consumption of cooking oil market in China

Even though the revenue in the cooking oil market in China has been increasing at a decreasing rate, the production volume of cooking oil especially vegetable oil in China has been decreasing since 2017. In 2017, the total production volume was 60.718 million tons, which was about 8 million tons fewer than that in 2016. In 2018, the figure experienced a continuous decrease to 61.585 million tons.

On the other hand, the consumption volume of cooking oil especially vegetable oil had a stable increase with 4.54% of YOY on average during the period of 2012-2018. In 2018, cooking oil consumers in China consumed 34.4 million tons of vegetable oil.

Distribution channels in China’s cooking oil market: dominated by hypermarkets and supermarkets

Hypermarkets and supermarkets (small or large scales) are the major distribution channels in China’s cooking oil market. In 2018, they accounted for more than 50% of the sales volume. 　　

Future trend in China’s cooking oil market: product and quality matter

Due to diverse consumer preferences, product diversification and quality orientation are the trends in cooking oil industry in China. Well-known brands like Jin Long Yu, Lu Hua and Fu Lin Men, dedicate to develop novel products such as rice oil and camellia seed oil. Lu Hua has improved the quality of its current product, peanut oil by controlling its acid content. It is believed that quality and quantity of products in China’s cooking oil market will become the key drivers of success in this industry.

Secondly, millennial cooking oil consumers in China have facilitated the change in China’s cooking oil market. As more and more Chinese people who were born in the 1980s and 1990s have had their own families, some of them are likely to purchase niche cooking oil in China, such as olive oil, corn oil, and camellia oil. Niche cooking oil will be the profit driver in China’s cooking oil market. Satisfying millennial consumers in China’s cooking oil market will lead to brand success.

Brand analysis in China’s cooking oil market

Key players in China’s cooking oil market: high CR4

After years of development, the concentration ratio in China’s cooking oil market has become high with the value of 63.8%. In other words, the top 4 companies, Wilmar International, COFCO, Shandong Luhua and Xiwang Food, are the key players.

Arawana and Fu Lin Men are 2 of the most famous cooking oil brands in China. The former was a brand of Wilmar International while the latter one is a branch brand of COFCO. Those top companies eventually monopolized the entire cooking oil industry. Followed by Lu Hua and Xiwang, the brands of Shandong Luhua and Xiwang Food respectively. In terms of western olive oil, Chinese indigenous brand Duo Li and Spanish brand Lamasia take the lead in the market.

Wilmar International Limited

According to IBISWorld, Wilmar International Limited is the largest agribusiness group in Asia. Its major business activities are oil palm cultivation, cooking oil refining, oilseed crushing, consumer-pack cooking oil processing and merchandising, specialty fats, oleo chemical and biodiesel manufacturing, and grain processing and merchandising.

Established in 2006, Yihai Kerry Investments is a subsidiary of Wilmar International and it is China’s largest producer of consumer-pack cooking oils and the largest oilseed crusher, cooking oil refiner and specialty fat and oleo chemical manufacturer. Currently, Yihai Kerry Investments has 48 oil refinery subsidiaries and 10 oil refinery associates in China, and an oil refining capacity of more than 18.3 million metric tons per year.

Its well-known brands are Arawana and Kou Fu. Arawana is a famous cooking oil brand in China and was also the official cooking oil of the 2008 Beijing Olympics.

COFCO Group

According to IBISWorld, founded in 1952, COFCO Group is a leading grain, oil and foodstuff import and export group, and is one of the largest food manufacturers in China. The company is also one of the world’s top 500 enterprises. Fu Lin Men is one of the brand of COFCO. In 1993, the first product was launched in Tianjin.

Shandong Luhua Group Co., Ltd.

According to IBISWorld, established in October 1993, Shandong Luhua Group is a private limited liability corporation. Annual peanut oil and sunflower oil productions are approximately 900,000 tons and 100,000 tons respectively. As a result of these, the company is the largest peanut oil extractor in China. Currently, SLG has 200 marketing branches, covering the domestic market. SLG has invested significantly in research and development of different crushing techniques to produce healthier edible peanut oil.

Luhua is the third most famous cooking oil brand in China after Arawana and Fu Lin Men and is the leading brand in peanut oil market, with more than 70% of market share.

Author: Amelia Han

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Perfect Diary’s Market Strategy

Perfect Diary is a young Chinese makeup brand established in 2016 targeting women aged 20-35, who have a relative high spending power. On March 2017, it started online business on Taobao and Tmall. Half a year later, Perfect Diary opened on Xiaohongshu, WeChat store and hosted three Pop-up stores in Shanghai. In 2018, It established Douyin and JD store. On January 19^th 2019, it owned the first offline experience store in Guangzhou. As of June 2019, it has 40 offline stores in China.

During the 11.11 promotion on Tmall in 2018, Perfect Dairy became the top Chinese makeup brand and achieved 100 million RMB turnovers within 13 minutes on Tmall in 2019. It continuously topped the list and even exceeded famous international brand L’Oréal, Maybelline, etc.,

[Source: Tmall, “Perfect Diary tops the list of Chinese makeup brand ”]

[Source: Tmall, “The rank of Chinese makeup brand on Tmall Double 11 promotion”]

In the “Hurun Greater China Unicorn Index 2019 Q3” report published by Hurun Research, Perfect Diary was ranked 6^th on the top new Unicorn list, with valuation at 7 billion RMB.

[Data source: Hurun, “The top new Unicorn list in Hurun Greater China Unicorn Index report ”]

Sales drivers of Perfect Diary

Perfect Diary is regarded as the king of Chinese makeup brands. It has extraordinary performance in China’s cosmetics market. In this case study of Perfect Diary’s market strategy, we have found three main factors that contribute to its success.

Co-branding collaboration with popular IP

Perfect Diary has cooperated with the Discovery Channel, the British Museum and the New York Metropolitan Museum of Art to launch new products in China’s cosmetics market. The eyeshadow palette jointly produced with the British Museum achieved a sales of 1 set every 11.5 seconds during 11.11 promotion in 2018. In addition, Perfect Diary and New York Metropolitan Museum of Art launched co-branding lipsticks achieved both word of mouth and sales during 618 promotion on Tmall 2019. Recently, Perfect Diary also takes advantage of the “national tide” trend and cooperated with National Geography to launch the newest eyeshadow palette. The views on Weibo reached 7.4 million.

[Source: Perfect Diary, ”Eyeshadow launched by Perfect Diary and National Geography”]

Utilizing social media as the main promotion channels

Perfect Diary utilizes social media to reach potential consumers. In spite of promoting on normal social platforms like Weibo and WeChat, it also leverage the community advantages of Xiaohongshu (50% of users are below 30 years old) and Bilibili (80% of users were born in the 90s). Perfect Diary’s official account on Xiaohongshu has 1.793 million followers. We can see more than 110,000 notes when searching for the keyword “Perfect Diary”. Also, when searching it on Bilibili, the number of results reaches the upper limit of 50 pages. And there are many attractive titles like “the most cost-effective products”, high quality domestic cosmetics products” and so on.

[Source: Xiaohongshu, bilibili, “Homepages of Perfect Diary on XHS and bilibili”]

Though intensive promotions on social media, Perfect Diary has accumulated a lot of high-quality users’ reviews boosting the brand reputation and reaching more young users.

Effective KOL strategy

[Data source: 36kr, “the logic of Perfect Diary ‘s promotion strategy”]

We can observe the logic of Perfect Diary’s promotion strategy from 110,000+ notes related to this brand on Xiaohongshu.

Firstly, collaborating with celebrities to lead trends and create momentum. For instance, Perfect Diary maximized the fans ’economy by launching ‘the Little Black Diamond’ series lipstick with Chinese celebrity, ZhuZhengting. The fans’ participation and interaction is intense during this promotion. The limited edition products sold out in only three seconds.

Secondly, cooperating with KOLs who can contribute high-quality content and motivate word-of-mouth marketing. Perfect Diary cooperated with Li Jiaqi, who is a web sensation to recommend Perfect Diary’s products during his live broadcasting. During the 11.11 shopping festival, Perfect Diary teamed up with him to launch the ‘small pink diamond’ lipsticks. Its brands’ visibility reached the peak of all Chinese cosmetics products. Finally, by utilizing the bandwagon effect, Perfect Diary can get more in-person experience shared by common users to reach more consumers.

Converting public traffic (traffic from marketplace) into private traffic (traffic from self-owned channels) at low cost

[Source: daxue consulting, “Acquiring process of Perfect diary’s private traffic in China”]

Perfect Diary attaches promotion card with products sold on marketplace and using lucky money to encourage consumers to enter its private traffic pool. After adding personal account Xiaowanzi, she will give access to customers to get lucky money and send personal invitation to enter private traffic group.

How Perfect Diary Implements Private Traffic Marketing?

Private traffic in China is a trending term among Chinese marketers in recent years. It refers to users that can be reached freely and communicated with repeatedly. Building brand-owned traffic pool and reaching customers would be lower in cost and easier, as compared with paid channels. Perfect Diary is an outstanding example of operating private traffic in China. Let’s see how it implements private traffic marketing.

Creating a virtual KOC character to get closer to customers

Perfect Diary created a virtual KOC character Xiaowanzi小完子, who has similar characteristic with Perfect Diary’s target consumers and plays the role of customer’s beauty consultant, friend, provider of benefits-related information and real-time customer service. This KOC character can help the brand build closer relationship with consumers. Based on close relationship, Perfect Diary makes communication more effective and efficient.

[Source: daxue consulting, “Character image of Xiaowanzi”]

Building personal connections with consumers

[Source: daxue consulting, “Black technology behind Perfect Diary’s personal account matrix”]

Perfect Diary creates a personal account matrix to provide customized service. By leveraging group control technology, Perfect Diary created hundreds personal account with unified character image called “Xiaowanzi”. Normally, each WeChat personal account can have no more than 3000 contacts. So, Perfect Diary has already had millions of followers in its private traffic pool.

Effective communication to inspire re-purchase

Different personal accounts of Perfect Diary not only share high quality contents in WeChat moments to stimulate shop desire but also provide promotion contents in the consumer group they managed.

[Source: daxue consulting, “Effective interactions of Perfect Diary’s personal accounts”]

Perfect Diary has hundreds of private traffic groups, and each is managed by one personal account. The manager Xiaowanzi acts as a reliable friend and provides exclusive service for all consumers in the group.

Maintaining retention on brand-owned sales channels

Perfect Diary has 6 public accounts and each of them are WeChat store entry points.

[Source: daxue consulting, “Entry points to Perfect Diary’s WeChat stores”]

Links in each WeChat post provide entrance to Perfect diary’s flagship store, which is the main shopping channel on WeChat, providing with all products. Links shared by Xiaowanzi in the WeChat group also provide entrance to the branch store called “Abbys choice”, which might relate to each personal account’s KPI.

Establishing new private traffic pool based on offline stores

[Source: daxue consulting, “Perfect Diary established new private traffic pool based on offline stores”]

Perfect Diary has upgraded its market strategy to focus on new retail since 2019. It has opened 40 offline stores in 2019, and plans to open 600 stores in the next 3 years. By establishing offline stores, the brand aims at improving shopping experience and create new private traffic pool. It hopes 65% customers in offline stores are new consumers, who haven’t bought their products online. After purchasing products in offline stores, customers will be given free gifts and motivated to enter Perfect Diary’s new private traffic pool, which is managed by a new KOC character called “Xiaomeizi 小美子”

Best Example of Private Traffic Marketing

Perfect Diary’s market strategy is a perfect example to learn how to gain independence from the marketplace. It leverages KOL strategy and creates brand recognition on social media platforms in order to stimulate purchase desire. Then it converts rich outside resources into its private traffic pool on WeChat, which can be conducive to re-purchasing and realizes consumer retention.

Private traffic costs less while public traffic is becoming more and more expensive. So, it is high time that a brand should gain independence though establishing private traffic in China. If you want to know how to get brand independence in China, email our project team at dx@daxueconsulting.com to start your China market strategy project.

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Consumption analysis of the condiment market in China

The main products of the sauce and condiment market in China

Among all kind of sauce and condiments in China, soy sauces, vinegar, salt, monosodium glutamate (MSG), cooking wine and sugar are the most frequently used. However, sauces and condiments can also be categorised into; Table sauces which includes (mayonnaise, Soy sauces, Vinegar, ketchup, Mustard, Salad dressing, Chilli sauces, Soybean paste, etc.) while Cooking ingredients includes (Herbs and spices, Pepper, Salt, Sugar, Monosodium glutamate, Soy sauces, Ginger, Onions, etc.)

From 2010 to 2017, the compound annual growth rate of sales revenue in the condiment market in China exceeded 11%. In 2017, the market size reached 332.2 billion RMB, which recorded an increase in 8.1%. By 2020, it is expected that the condiment market size will exceed 400 billion RMB.

Consumer analysis: Chinese flavour preferences

Spice is the favourite flavour of the Chinese people accounting for 33.62% of their flavour preferences. Salty and Sweet have a huge potential market potential of 30.81% and 16.07 % respectively, while only 5% of the people like sour. Although China is known for being one of the countries with the highest salt intake, spicy sauce is the most popular Chinese condiment. Families with babies usually prefer soybean pastes and tahini instead of spicy sauce. The most popular foreign condiments in China are ketchup, salad dressings, and black pepper.

Spicy is the most popular Chinese sauce. Families with babies usually prefer sweet soybean pastes and tahini instead of spicy sauces. The most popular foreign condiments are ketchup, salad dressings and black pepper.

Consumer analysis: The purchasing channels and sizes of the condiment and sauce market in China

The main purchasing channels of condiments in China supermarkets account for 69% of the total purchasing channels, in other words, the Chinese still prefer supermarket channel to buy their condiments. In offline and online shops, the most common size of condiments’ container or bottle are 500ml.

Consumer analysis: The main influence factors 

There are many influencing factors that always motivate consumers towards some particular brands. The Chinese consumers pay most attention to taste, brand reputation and production dates. KOL’s opinions can affect consumers purchase decisions but mainly focus on high-income families

The main consumption considerations of sauce and condiments in China

Baidu index analysis- Interest trends

Baidu index of Soy sauce in China

The number of searches of soy sauce peaked on October 15, 2018, when Jiangsu province published a report comparing the quality of different brands of soy sauce products. When people search soy sauce on Baidu, they usually browse soy sauce products and the way of using soy sauce.

Data from 2018.6 – 2019.6

Baidu index of MSG in China

The number of searches of monosodium glutamate (MSG) fluctuated around the average index, and the search number reached the highest point in November 2018 when CCTV released the news that MSG is not harmful to the human body. When people search MSG on Baidu, they usually browse benefits and harm of MSG.

Data from 2018.6 – 2019.6

Baidu index of ginger in China 

The number of searches of ginger remained high from June to October in 2018, but in January 2019 the search number declined and reached its the lowest point during the 2019 Spring Festival. When people search ginger on Baidu, they usually browse the efficacy and possible uses of ginger.

Data from 2018.6 – 2019.6

Baidu index of oyster sauce in China

The number of searches of oyster sauce remained high from Jan to Feb in 2019, reaching the highest point during the Spring Festival. When people search for oyster sauce on Baidu, they usually browse oyster sauce products and the way of using oyster sauces to make tasty dishes.

Data from 2018.6 – 2019.6

Baidu Index – Semantic analysis of sauces in China

The semantic analysis show the most related keywords to “Soy sauce” are “Haitian” (a Chinese soy sauce brand), “Soy sauce brand” and “Fried rice”.

The semantic analysis show the most related keywords to “Monosodium glutamate” are “Chicken seasoning”, “Rose’’ and “Harmful effects of Monosodium glutamate”.

The semantic analysis show the most related keywords to “ginger” are “Efficacy and effect of fresh ginger”, “Efficacy” and “Fresh ginger is a cure for hair loss”.

The semantic analysis show the most related keywords to “Olive oil” are “The efficacy and effect of olive oil”, “How to use olive oil” and “Efficacy”.

Consumer perception analysis of sauce market in China

Zhihu is the first question and answer website in china and has transitioned to a social media sharing platform gathering more than 100m answers on various topics. The platform is especially relevant to reach higher and well-educated social classes. On, Zhihu, the most common question and posts about condiments consist of the following:

• Chinese citizens are curious about the importance of condiments in Chinese food and its effects.
• What kinds of condiments are healthy (e.g.: containing low calories)?
• What other cultures sauce or condiments can be good to mix with Chinese food?

Positive consumer perceptions of the condiment and sauce market in China

WeChat and Weibo are the most effective social media platform for which Chinese customers express their perception and commendation on certain brand. WeChat is the most used messaging application in China and an absolute must have for a market entry promotion. It accounts for over one billion active users. While, Weibo is china’s biggest social media network that was launched in 2009. Over the recent years, it has been transformed from a Chinese equivalent of twitter to a comprehensive platform. Some positive perceptions Chinese customers about condiments and sauces on Weibo & WeChat are; Most Chinese people love the taste of condiments and sauces, some condiments are good for health and are appreciated by Chinese people and condiments can help beginners to make tasty dishes more easily.

Consumers’ negative perceptions of condiments and sauces in China

On other hand, some negative perceptions of Chinese customers about condiments and sauce on Weibo and WeChat are; most sauces and condiments contain high calories that may increase consumers weight, too much intake of some condiments may lead to health problems and the excessive use of condiments.

Consumption context of sauces in China

Consumption is the one of the key drivers of product success and based on information from Weibo, WeChat and other Chinese social media platform, the most common purposes of buying condiments and sauce among Chinese customers are:

1. Use them directly during cooking
2. Making new flavours by mixing condiments.
3. Sterilizing food (salt and vinegar)

However, Chinese customers do use social media not only on expressing their mind, perceptions, but also videos and pictures of the concern discussion topic. The Fig(a), was taken from a consumer’s kitchen and shared on Weibo. In the picture, the consumer is using salt to cook. While figure (b) was taken from a video that shows people how to make delicious sauce by mixing different condiments.

Online trends: consumer perception of sauces in China

This section give an intuitive both analytical and theoretical summary, overview of brand marketability by providing an avenue to customers to express their perception. On Tmall/Taobao and JD, besides good tastes, other positive feedback includes high quality, extensive use, satisfied free gifts, fresh production date, good packages, reasonable price and fast delivery. Negative feedback focuses more on bad taste, small size, broken packages, expired products and high price.

Competition analysis of the condiment and sauce market in China

Competition analysis: Table sauce brands in China

On Taobao/Tmall, domestic and international brands both have high sales, some international brands even more popular than Chinese ones. As we can see, the Kewpie brand has the highest sales on Taobao, with the total sales of 648,662 items. The main reasons are some International brands localized their products by catering to the popular taste in China and more Chinese people accepted foreign dishes/tastes

Competition analysis: Cooking condiment brands in China

Chinese cooking condiment brands have much more sales than international brands on Taobao/Tmall since their products better fit Chinese people’s flavour preferences. From the above table, we can see that Totole has the highest sales on Taobao, with the total sales of 290,982 items. International brands offer both Chinese and foreign condiments to attract more local consumers, thus their competitiveness is increasing.

E-commerce landscape of Soy sauce in China

On the Tmall, the price range of soy sauce which weighs around 800ml is huge (more than 900 RMB). Popular products are usually priced at about 49 RMB. Foreign brands of soy sauce products online are usually more expensive. In order to attract consumers, these products can be purchase on installments.

E-commerce landscape of table salt in China

On the Tmall, the price range of edible salt which weights around 300g varies widely. The top seller and cheapest goods are the same product at 2.7 RMB. Many consumers like cheapest edible salt. Wether containing iodine or not is an important criteria for purchasing edible salt online. Now, people prefer to buy edible salt without iodine.

E-commerce landscape of  ginger in China

On the Tmall, the price range of fresh ginger with the same weight (such as 500g) is small (around 22 RMB). Popular products are usually about 10 RMB, Freshness is an important criteria for purchasing ginger online. There are no important ginger product on the market.

Business cases – Kraft Heinz (卡夫亨氏) Digital activity of Kraft Heinz in China                     

Kraft Heinz is a famous F&B brand from the USA and officially entered China’s condiments and sauces market in 2010 by merging a Chinese condiment company. Then the brand-built factories in China to increase output and expand market share.

In order to adapt to the Chinese market, the brand provides traditional Chinese soy sauces and also sells Western sauces (such as tomato ketchup) to attract young consumers who prefer western cuisine such as fast food.

E-reputation of Krafy Heinz in China

The most related keywords of “Heinz” are “Heinz’s tomato ketchup”, “Heinz’s rice noodles”, “Kraft Heinz recruitment”, “Kraft Heinz company” and “The stock of Kraft Heinz”. On social media, Kraft Heinz usually posts info about new arrivals and important events. Recently, the brand started to use Ed Sheeran as new spokesman and he made a video ads to promote the tomato ketchup of the brand, he is a famous singer from England and also has many fans in China. The musician is on Chinese social media platforms, at has many followers.

Business cases – Knorr (家乐) Digital activity of Knorr  in China

 Knorr is an international brand created in Germany and bought by the Unilever Group. The brand entered China’s market in 1993. Knorr’s main products are chicken essence, soup bases and other compound condiments for cooking. In order to attract local consumers, the taste and package design of those products adapt to the Chinese people’s needs. Knorr’s official website mainly displays products, cooking tips, and healthy recipes.                                                                         

E-reputation of Knorr in China

On e-commerce platforms (Taobao/Tmall), the positive feedback consists of “cheap price”, “good quality”, “nice taste”, “nice package” and “long expiry date”. Negative feedback focuses on bad taste. On social media platforms, Knorr mainly publishes video ads, new arrivals and promotion activities, such as lucky draw and discount. The brand also works with some of China’s food KOLs to expand brand awareness.

Business cases – McCormick (味好美) Digital activity of McCormick in China

McCormick is an American brand and entered China in 1989 by opening a factory in Shanghai. McCormick mainly provides both western sauces and cooking ingredients such as pepper products, tomato paste and salad dressing. Health is a primary selling point of McCormick’s goods. The brand’s condiments and sauces are all made by pure natural raw materials, which match the increasing awareness of health among China’s consumers.

E-reputation of McCormick in China

On e-commerce platforms (Taobao/Tmall), the positive feedback consists of “fast delivery”, “good quality”, “reasonable price”, “nice taste” and “long expiry date”. McCormick launched new arrivals in June 2019, it’s a type of cumin powder for cooking meat. Negative feedback focuses on bad taste. McCormick generally posts important activities, cooking knowledge and videos with the brand’s condiments & sauces. The brand also recommends some dishes from other countries to attract more attention from consumers.

Comparing online interest for leading sauce brands in China

 From the Baidu index, we can see that Lao Gan Ma showed the highest search frequency with average of 2000 and LeeKumKee had the second highest search with of 500 search frequency index during the past 90 days. On WeChat index, Kraft Heinz showed a significant high search frequency in June 2019 when the brand used the famous English singer Ed Sheeran as its new spokesman. This show the effectiveness of their promotion strategy of using celebrity in promoting their product.

Brand advertising case study-Lee Kum Kee (李锦记)

By visualizing the high-grade raw ingredients, the ad successfully undermines consumers’ attention regarding additive use in condiments and gains much credibility for the brand. The ad is quite strategic, it started with a lady bringing dishes while other family members are happily chatting. Then follows a close shot of soybeans with seemingly premium qualities. The ads then showed when and how consumers can add the product in different dishes. In the end, the video displayed diverse dishes placed around the bottle.

Brand naming – case studies of sauce and condiment brands in China

The Chinese names of condiments and sauces brands can make consumers easily associate with their products and they generally contain two meanings. The first meaning refers to their products have wonderful tastes or can help consumers make delicious dishes. While the second meaning refers to consumers’ family will enjoy the dishes made by their condiments and sauces. Below are some examples:

味事达(Master, Kraft Heinz) : “味” means “flavor / taste”, “事” means “matters / things” and “达” means “reach”. The Chinese name implies consumers can quickly make delicious dishes by using the brand’s condiments.

家乐(Knorr): “家” means “family” and “乐” means “happy”. The Chinese name implies consumers’ family will feel happy after using its condiments to cook.

味好美(McCormick): “味” means “flavor/taste” and “好美” means “very good/delicious”. The Chinese name highlights the products (condiments and sauces) of the brand have wonderful tastes.

Distribution & Promotion of sauce and condiment brands in China

Restaurants and supermarket are the most important distribution channels for condiment and sauce brands for offline distribution channel, because restaurants usually purchase a large number of products and supermarket is the most popular channel for personal buyers. However, specialized condiment shops and wholesale market have shown a significant impacts towards the distribution of condiments and sauce in China. E-commerce platforms (third-party e-commerce such as Tmall/Taobao and JD) are also necessary channels for most brands since they are effective ways of promoting new arrivals and increase sales.

Online retail coverage of sauce brands in China

The number of sauces & condiment brands on JD is far more than Tmall/Taobao, mainly due to the higher requirements and deposit from Tmall for those brands want to enter the platform. Most Chinese brands have built official stores on those e-commerce platforms (such as Taobao/Tmall and JD), which increased their sales in the market.

Offline retail of sauce and condiments in China: Coverage in Shanghai

Condiments and sauces in China are mainly sold in supermarkets, convenient stores, wholesale market and specialized condiments shops. We use them as examples of distribution channels for condiments and sauces in Shanghai

On-the-shelf: representation of sauce and condiments in Chinese stores

In China, supermarket is the most popular purchase channel of condiments and sauces for consumers. In those stores, different kinds of condiments and sauces are placed on different shelves or they share the same shelve but clearly separated by types. Table sauces often use smaller packages and cooking ingredients generally have larger packs. The main packages of condiments and sauces are bottles and small bags

Online sales: Volume asseement of sauces in China

On Taobao/Tmall, soy sauces showed significant high sales in June, July and August 2019 as one of the most common condiments among the Chinese consumers. On other hand, among all kinds of table sauces on Taobao/Tmall, Chili sauces had the highest sales in June, July and August 2019. However, the spicy is the most favorite flavour of the Chinese people.

Promotion channels to leverage for international condiment brands in China

Considering the rapid development of the market, the promotion channels can be on websites/Apps which includes (tiaoliao.net,cntiaoliao.com and twzj.cn). Taioliao.net, is the dedicated condiments & sauces webside, it offers information about relevant distributors, sellers and conferences. Also, specialized magazines (such as China condiment, Chinese cusine, Home gourmet and ZGDC) are part of promotion channels in China. China condiment is a Chinese magazine that focuses on condiments, it mainly introduces different types of condiments and how to use them during the cooking.

KOLs related to condiment and sauces in China

For international brands, KOLs are a huge part of modern condiment and sauce promotions, and young consumers are influenced by KOL’s shared opinions and experiences. China’s KOLs, who usually post content related to condiment and sauce on Weibo, mostly are food KOLs. Foodvideo, is a KOL account on Weibo mainly posts video about cooking process and methods and it has over 4.4 million followers. Some KOLs focus on food recommendations, products testing and recipe sharing.  Condiment and are frequently mention in those, and they are always important in every post.

Market trends of the condiment and sauce market in China

Health is becoming important to Chinese consumers: Due to the increasing health awareness among the Chinese people, many brands are trying to make products healthier with more natural sauces and condiments. The desire to consumer healthy and natural products certainly has an effect on the condiment market in China

Diversified flavors in food and cooking: Although many people still prefer traditional Chinese condiments and sauces, more young consumers are willing to buy compound and western condiments to try different tastes.

Social media and KOLs: In order to attract consumers in more effective ways, condiments & sauces brands are working with some KOLs to promote their goods on Chinese social media platforms. o

Author: Abdulhamid Sillah

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The benefits of BP and Didi partnership in China

EV Market expansion through BP and Didi partnership

Considering that China is the world’s largest EV market, the sector will continue attracting the huge investment from global multinationals, fueling research from both academia and industry, harnessing China’s economic growth as well as providing a ground for cross-border business collaboration. The EV market in China witnessed upward and downward trends over the years in terms of sales and the volume is expected expand in the future as the market is currently on a resurgence. China’s EVs market targets 2 million annual sales in 2020, and by 2025 the sales of electric cars account for 20% of the total auto market.

However, Cheng Wei, the chairman and CEO of Didi on his part believes: “It is a forward looking idea of combining strengths to create a robust EV charging network for China, promote the growth of the new energy automotive industry, and provide better experience for car owners across the country.”

A pilot site has been unveiled in Guangzhou based on the partnership agreement to cover 10 fast-charging units with the capacity from 60 to 120 kW. This ambitious move by BP and DiDi is designed to lead the EV charging market in China through the provision of high-quality, reliable, fast and safe charging infrastructure.

In recent years, China witnesses an immense and rapid development in electric vehicles accounting for about 50% of the world’s EVs market. The BP and DiDi partnership will operate under China’s sustainable energy transition as well as market expansion with the aim of increasing number of EV users, EV value optimization with effective and efficient utilization of service to the customers. 

BP and Didi partnership: Beyond mutual benefit of the companies

Over the years, BP is among the leading global energy companies that provide fuel for both conventional and electric vehicles worldwide. In 2018, BP acquired Chargemaster, the leading EV charging firm in the UK, and invested in StoreDot for a fast-charging innovative battery technology, this new move has widened the scope of BP’s operations and creates more ultra-fast charging sites for consumers in the UK.
In China, BP’s presence in the electric vehicle sector has been growing; the energy giant invested $10 billion in the NIO Capital with the new architectural plan for EV ecosystem. However, in order to meet up with the organizational objectives, BP engaged in equity investment with PowerShare. China offers tremendous growth opportunities for BP. Partnering with DiDi enables BP to actively contribute to China’s fast-growing EV charging market with differentiated offers, and also to further expand other business footprint in the country through the trickle down effect.

Beyond the mutual benefits to be derived by the BP and Didi in the partnership venture, various stakeholders ranging from consumers, businesses, government and the environment anticipate some benefits form this global venture based on the following;

Customer satisfaction; the future of transport is new energy vehicles, and ride-sharing will be a key link in promoting new energy on the road. The connection between drivers and customers will be enhanced through efficient and available charging stations on the platform of BP and DiDi Partnership.

BP’s presence in China and its previous partners

Emergence of BP in Chinese market

For decades now, BP is among the leading foreign players in China’s oil and gas sector. The company has engaged in several operations ranging from; petrochemicals manufacturing and marketing, aviation fuel supply, retail operations, lubricants blending and marketing, oil and gas supply and trading, LNG terminal and trunk line operation, chemicals technology licensing, and advanced mobility and venturing investments. Due to the effective service delivery, China signed an agreement with BP on Liquefied natural gas (LNG) in 2001, which seems to be the first of it kind. Furthermore, BP recorded a mile stone in 2018 by penetrated the Chinese lubricant blending market with an investment of $216 million (CNY 1.5 billion). With an estimate of annual capacity of 200,000 tones, the project was considered as the largest investment of BP in that sector.

BP and Didi partnership: A milestone to BP 

The statistics show a considerably low usage rate of only around 10% for public charging posts. In essence, this results from the plan towards rapid expansion in the early stage of charging infrastructure establishment, leading to a lack of necessary maintenance and poor utlitity management. The situation is expected to improve with the competition of charging industry becoming less fierce. As we are witnessing a booming growth of electric vehicles in the future, the country is looking forward to developing charging infrastructure efficiently and effectively.

Electric Vehicles market in China attract more investors

Didi demands for more Electric vehicles charging station

The number of Didi vehicles on China’s roads are estimated to reach 1 million by 2020, its paramount for the company to expand its domestic and international partnerships to support the infrastructure of these ambitious plans. In 2017, Didi signed a joint venture with Global Energy Interconnection Development and Cooperation Organization, to build the EV charging networks. “Didi’s charging networks will not only cover its own fleet but will also serve families and the public.” At a sustainable energy summit in New York, DiDi’s founder and CEO Cheng Wei said currently, Didi is the world’s biggest new energy fleet operator and runs more than 260,000 new energy cars, that are partially or fully electric, accounting for around 10 percent of the total 2 million new energy cars globally.

International companies investing in the Electric Vehicles market in China

Electric vehicles are gaining further ground in China’s automobile industry, and companies are betting and targeting huge market share and investment opportunities. Didi’s announcement on February 2018 that it plans to set up an e-vehicle sharing service with 12 automakers draws the attention of many companies. Those automakers will include both domestic companies, such as Geely and BYD, as well as some foreign companies, like South Korea’s Kia Motors, and the Renault-Nissan-Mitsubishi Alliance, which will enhance smooth cross-border business collaboration in China.

BP and Didi partnership: Strategic significance for Electric Vehicles market in China

Between 2014 and 2016, EV battery costs fell over 50% due to process improvements and scale effects, bringing EVs significantly closer to parity with an internal combustion engine (ICE) costs. EVs are exempt from license-plate lotteries and significant registration fees that apply for cars with internal-combustion engines. These exemptions are critical levers to make purchasing an EV more attractive, especially for younger, first-time car buyers.

Strategically, the BP and DiDi partnership is a welcome development in the EV market in China. Keeping in mind the strategic significance of new investments in an evolving and expanding market, the partnership is expected to impact positively in the following areas: job opportunities, new venture leads to new investments, new plants, new products and services. Ultimately leading to hiring more hands to manage the investment, and as such managers, engineers, financial analysts and other categories of workers.

BP and DiDi partnership: Creating more opportunity in the EV market in China

Many well-known, foreign automakers have already entered the Chinese EV market, including the leading Tesla, BMW, Nissan and General Motors among others. With some relaxations of the regulation on the new energy vehicles, it becomes a fertile ground for foreign electric carmakers to explore the EV market. The EV charging infrastructure in China is another key investment opportunity with increasing demand for electric vehicles.

Author: Abdulhamid Sillah

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China’s fitness industry has experienced both an explosion and now a recession

The history of fitness centers in China

China’s fitness industry started around 2000. After that, Beijing’s successful bid for the Olympic Games in 2001 and the SARS epidemic in 2003 set off a nationwide fitness trend. China’s fitness industry was in its prime. During that time, many well-known chain brands such as Hosa Fitness, Nirvana sports, and UION Life began to appear. The industry gross margin exceeded 40%, attracting a large number of players to enter.

After 2004, the fitness industry in China showed explosive growth. In 2010, Beijing had 530 fitness clubs. However, due to the serious homogenization of fitness clubs and the single profit model, gyms competed with price wars. On the demand side, the global financial crisis in 2008 and the rise in housing prices, the spending of white-collar workers on fitness decreased, and the growth of the fitness industry market slowed down. In 2011, the number of gymnasiums in the country showed negative growth.

Until 2015, with the rise of fitness apps represented by “Lefit“, “Keep“, “Super Monkey“, the fitness industry once again ushered in rapid development. However, the new direction of development did not favor traditional fitness centers, and exposed the problems of fitness centers in China.

The current conditions of China’s fitness industry

The population of gym-goers in the United States accounts for 20.3% of the total population, while in China it is only 3.1%. Though China still has a large gap in the number of fitness clubs and the number of fitness members, China’s fitness industry is continuously expanding. According to the National fitness plan 2016-2020, the number of people who take part in physical exercise at least once a week will reach 700 million in 2020, and the number of people who take part in physical exercise regularly will reach 435 million

Compared with the North American market, the development of China’s fitness industry is relatively lagging due to the following reasons: Firstly, the domestic cost of fitness is higher; the per capita fitness expenditure in China is more than the US. Additionally, the fitness industry in China has a single format and a serious homogenization of service content.

Hosa Fitness collapsed overnight. The mass closure of fitness centers in China

Problems of fitness centers in China: the prepaid model leads to high debt ratio

According to the 2018 fitness industry report, nearly 84% of fitness clubs last less than 12 months. There are various reasons for the closure, such as increased competition in the market, poor management, the downturn in the economic cycle, etc. However, problems of fitness centers in China are all about “cash flow drying up”.

Just as most service industries, China’s fitness industry adopts a prepaid model. Fitness clubs receive cash flows for the next year or even five years at the moment they sell their year cards and private courses, which makes the payoff period extremely short. Some clubs can even recoup their investment costs as soon as they open, and locking up customers at the same time. The problem, though, is that these huge cash flows are not counted in the club’s profits. There’s a joke going around in the fitness industry.

“When the club’s membership consultant makes money, the coach makes money, and even the front desk makes money, the boss doesn’t necessarily make money.”

Sales commissions for membership consultants and coaches are paid out the same month. In order for a fitness center’s owner to profit, the gym needs to continuously acquire new customers. Many clubs’ owners bet on the ‘hot headed’ compulsive buying of fitness beginners. In other words, the gyms profits are dependent on the immediate decisions of beginners, but not on retaining loyal customers. Under this condition, many fitness centers are more concerned with the selling power of membership consultants and coaches rather than the quality of service they provide for current members.

This creates a vicious circle. A fitness club can only roll cash flow by absorbing new members without any intention to improve service quality. Without improving service, there will be no renewal rate in the second year. Therefore, it is the norm for fitness clubs to go out of business after only two or three years. The biggest problem here is that the prepaid model makes the club’s debt ratio too high.

The impact of debt on fitness centers in China

What are the consequences of a high debt ratio?

From the management perspective, the fitness club will only have expenses with no income in the coming year for every member. The gym loses money even if members only come to bathe without using any equipment.

In terms of capital, high debt ratio makes the club’s ability to resist risks very weak. Once the market environment changes, it is easy for traditional fitness centers to crash. Hosa Fitness is a typical example. Once Hosa International (the parent company of Hosa Fitness) stock price crashed, the company’s capital chain fractured. Negative news triggered consumer panic, causing the performance of the Hosa Fitness to decline. Because the cash flow was no longer sustainable, Hosa international was unable to provide support, and Hosa Fitness failed to seek financing alone and eventually collapsed.

In fact, when Hosa Fitness announced its official opening in 2017, it should have encountered insufficient funds. Normally, fitness chains insist on directly operating their stores, but Hosa Fitness had to switch to franchising their stores to get funds.

For the prepaid model, China’s government departments lack effective regulatory measures. According to the “Corporate Bankruptcy Law“, when enterprises are bankrupted and liquidated, the wages and labor insurance expenses owed by the enterprises are preferentially paid off. Then is the taxes owed by the bankrupt enterprises. Since gyms that bust tend to owe large salaries, there has been a lot of spending chaos. For example, it is hard to re-sell memberships, and the gyms refuse to give refunds, hence gym members encounter unfair treatment in the fitness centers.

Traditional gym chains in China are often battered with negative reviews. According to the comments on Dianping, among the 18 fitness clubs of 6 well-known chain brands, the lowest rate of negative comments is at 9.7%, the highest at 31.1%, reaching 21.5% on average, and the rate of positive comments is only 65.6% on average.

How can China’s traditional fitness center survive and go further?

With the warning of Hosa Fitness, is there a way out for China’s traditional fitness centers? What are solutions to the problems of fitness centers in China?

Firstly, reducing the prepaid period can reduce debt, switching the annual membership to a monthly system. America’s experience may be instructive here. The mainstream of fitness clubs in the US offer monthly membership. In general, the monthly card is charged 50-60USD, and the high-end one is about 100USD per month. Also, there are some compromised approaches, such as a seasonal card or half-a-year card, etc. But this way will also increase the pressure on cash flow, pressing higher requirements for the operation.

Another option is to improve the attendance of classes. Registrations for classes and training sessions are good indicators of the success of a fitness center, as they are a method to make secondary profit from current members. Data show that in 2018, the average number of private training sessions in Hosa Fitness was only 67.3 classes per month.

There are also ways to improve cash flow by increasing retail sales, such as water bars, nutritional supplements, and peripherals. But for now, this is still a small supplement. According to the 2018 fitness industry data report by 三体云动, retail sales account for only 3.1 % of gym revenue.

It is difficult to achieve a low debt ratio in traditional fitness clubs without changing the target users and product forms. In terms of problems of fitness centers in China, traditional gyms need further transformation and upgrading. The model of traditional fitness clubs in the future must not be as sales-oriented and must pay attention to service and reputation. The profit model in the past will be gradually eliminated, and the traditional fitness clubs will eventually return to being service-oriented.

For example, gyms can use group classes to attract new customers. The Chinese fitness population is small and the starting point is low. Classes offer a good starting point for beginner, and can stimulate secondary consumption. Judging from the popularity of Super Monkey, Spacecycle, Keepland, traditional fitness clubs in China also need group courses to increase users.

Group classes can also increase the stickiness of service. Under the current system, the level of private coach’s service is widely criticized. On the one hand, the expertise of fitness coaches is uneven. The data shows that half of the coaches in China have been in business for less than two years, and the coaches from professional sports colleges only accounted for 25.2%. On the other hand, the sales-focused model of fitness clubs does not play a positive role in consumer experience. Therefore, to improve service and increase the stickiness, the key is to improve the level of personal trainers and create a consumer-focused management system.

The new emerging business model of the fitness industry in China

The threat of new-style fitness centers

As mentioned earlier, the new type of fitness club is threatening the traditional gyms. The following will introduce the profit model of the new type of fitness club in China.

Take SUPERMONKEY as an example. SUPERMONEY is a fitness brand from Shenzhen. The first group class studio of SUPERMONKEY came out in 2015. Most of its studios are located in business districts, with class times before working hours, during lunch, and after working hours.

SUPERMONKEY profits mainly from two aspects: one is cash flow, and the other is cost structure control. In terms of cash flow, the price of each class of SUPERMONKEY ranges from 69 RMB to 239 RMB. Normally, one studio can hold 300 training classes a month, with about 15 people for each class, so the annual revenue of a single store is about 3.8 million RMB.

SUPERMONKEY classes are booked through the WeChat mini program, which allows customers to select and pay online based on store location, class type and class time.

In terms of cost structure, there are six types of SUPERMONKEY stores: universal stores, theme pavilions, bicycle studios, parent-child stores, static stores, and fitness cabins. The area of a store generally between 200-300m² often located on the second or third floors of malls and office buildings. To reduce costs, there is no front desk or locker rooms. The coach only comes during class, and the users can enter the classroom by entering a code sent only to those who register for the class, which greatly reduces spending on employees.

In the course development and coaching reserve, half of the courses currently come from Lesmills courses, and others are the independently development by SUPERMONKEY. The copyright price of introducing a Lesmills course is high, more than RMB 100,000. Therefore, 90% of the gyms in China, especially the small gyms, do not purchase copyright. In addition, SUPERMONKEY established the Super Scarlet Academy to train its fitness instructor. This is also a preparation for the SUPERMONKEY to start a large-scale private training course or even open a comprehensive fitness center.

A good way to target fitness beginners as the main customers

Whether it’s SUPERMONKEY, Lefi or Keepland, they are all doing the same thing: targeting fitness beginners. Once again, the penetration rate of the fitness population in China is only 3.1%. According to insiders, 99% of those who signed up for an annual membership in traditional fitness centers are fitness beginners. In terms of the current market and the people’s fitness levels, group classes are more in line with the needs of fitness beginners.

Specifically, what are the needs of fitness beginners? They do not need to time and money into a rigorous training schedule with a personal trainer. Rather, they desire to experience the feeling of fitness, find happiness in sweating, and even to show off their healthy lifestyle in WeChat moments. Therefore, the pay-per-visit group classes are enough to meet the needs of fitness beginners.

What about the future?

Targeting fitness beginners is just one of the hottest trends in China’s fitness industry right now. Whether it is a traditional fitness club, or a new type of group classes studio, it is not that easy to lock-in customers. Li Lu from Daxue consulting says,

“Nowadays, customers are disloyal, especially younger ones. Group exercise classes and traditional fitness centers have to find their own irreplaceable points to lock-in customers.“

Unique courses, professional coaches and appealing studios can all be features of a fitness club. Fitness centers need to provide a sense of belonging to disloyal customers. In addition, marketing measures for traditional fitness clubs are old-fashioned, such as flyers and telemarketers. Gyms are better off switching from flyers to digital marketing. When the focus shifts away from desperately making profit to serving the customers, a lot more fun and attractive business models are available to gyms.

Author: Rita Fan

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This article Hosa Fitness closed its doors. What is causing the downfall of China’s traditional fitness centers? | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Matthieu David: Hello everyone. I am Matthieu David, the founder of Daxue Consulting, a strategic market research company based in China, and this China marketing podcast, China Paradigm. Today, I am with Shiny Cheng. You are the founder of Shinjia. In Chinese, Shinijia is a way of saying “a comfortable house for you” or “a more comfortable house.”

I am not sure about this, but in Shanghai, under your management, you have more than 1000 apartments that you are renting out. They are beautifully furnished and already furnished and renovated. I saw the pictures. Actually, it looks like they are pictures of the most beautiful Airbnb you can find. 

You started the apartment renting business in China about seven years ago. You started without investment, fully bootstrapped. And now, you have a footing in Shanghai. And as I was saying, you have 1000 apartments under your management. You started the apartment renting business in China very young. I feel it’s nearly just after graduation. That’s something that I’d like to know more of as well. Thank you very much for being with us on a Saturday. That’s why there aren’t many people in your office currently. For people listening to us, we are recording the video for this interview as well. My first question is, what’s the market sizing of your apartment renting business in China? It could be in terms of revenue, the number of people, or the number of apartments. Is it 1000 or more?

Shiny Cheng: Okay. Thank you, Matthew. Hi, I am Shiny. Actually, it’s not 1,000 apartments. Sorry. I want to correct that. It is 1,000 apartment rooms. 

Matthieu David: I see. 

Shiny Cheng: Basically, my apartment renting business in China is about co-living apartments. So, we provide a very good and unique design at a very good price. We provide shared apartment rooms to young professionals, students, and also international young workers are living in Shanghai who want to find roommates in China. Most of the apartments are in the downtown of the city. 

Actually, I started my apartment renting business in China when I was 23 years old. So, I just came to Shanghai after university. I couldn’t find the ideal apartment I wanted to live in. I wanted to live in a downtown apartment in Shanghai. The rental was always increasing. So, I couldn’t find them. My ideal apartment has a good price and also a good design. So, this was my problem back then. 

So, I started rental housing in China, and I did the interior design. And also, I chose a very good location. And I had my roommates, so I did not need to pay the rent for rental housing in China. I found out this was a good business opportunity. 

Matthieu David: So, what you are saying is that you didn’t have to pay the rent for rental housing in China because you found roommates who were paying a bit of a markup. So, they were paying for you, right? 

Shiny Cheng: Yes, because I made the apartment nicer. I added value to it. 

Matthieu David: I see. 

Shiny Cheng: Actually, in the beginning, there were 95% foreigners in Shanghai. But now, it’s like 70% of Chinese who are living in my apartment. 

Matthieu David: Wow. 

Shiny Cheng: They now like my apartment more. And also, we didn’t do any marketing in China. We just started advertising three months ago. Already, it’s 70% of Chinese people living here. 

Matthieu David: Impressive.

Shiny Cheng: Yeah. Like many startups had huge investments, but I didn’t have that time. Eight years ago, I didn’t even know what an investment was.  I was very brave with the first apartment I rented for apartment renting business in China. It was quite risky. I got the key from the agent, and then I said I could give him a double agency fee if he gave me the key for three days. 

And in the three days, I did the decoration very fast and rented it out. Then, I paid the owner the rent for rental housing in China. Probably, if I had ¥20,000 in my hand, I could do the next one. So, it’s a lot of cash flow. So, it’s like you can start from zero. We have our decoration team. We have designers. We also have a factory for the furnishing. So, it’s a lot of work. It’s not like doing everything yourself in the beginning. There is a lot of cashflows involved. Yeah.

Matthieu David: I see. So, if I understand well, you have 1,000 rooms. So, it’s a bit less than 1,000 apartments. Maybe 700 apartments. 

Shiny Cheng: No, it’s like 200 apartments but 1,000 rooms. 

Matthieu David: Okay. So, on average, you have five rooms per apartment. 

Shiny Cheng: More than 200. Maybe, 400-500. 

Matthieu David: I see. 

Shiny Cheng: Now, it’s like probably 900 rooms. It’s between 900-1000 rooms. But generally, it’s more than four rooms in one apartment. 

Matthieu David: I see. It’s a very interesting format because I believe the four or five rooms are more difficult to start rental housing in China to one single person. And actually, you are making it easier for the landlord to start rental housing in China to 4-5 people through your platform. You don’t have to take care of so many people. So, as I understand in terms of your business model, people pay you or your platform directly. I went on your website and for each apartment, there is contact. There is a specific person in charge. I don’t know if it’s someone already living in the apartment who is going to be in charge of the others or someone from your company. But basically, they contact this person. They pay you. And then, you have the rent for rental housing in China you pay to the landlord. I believe that it’s a long-term lease, like three or five years, because you renovate it. So, you have to have stability on the lease. And that’s your business model, isn’t it? 

Shiny Cheng: Yeah, people pay me directly because I’ve started rental housing in China from the owner for ten years. The people you contact for an apartment are my salespeople. Also, people can list apartments on the website. So, some people are also listing their own apartment on our website. But in the beginning, we only used this within ourselves. Now, people from outside also sometimes use our website to list their apartments or look for roommates because this is only for roommates.

Matthieu David: I see. 

Shiny Cheng: Now, we are also trying to create a roommates’ platform.

Matthieu David: That’s something which makes me a bit confused because I saw a button which said I could add my own apartment. And from my understanding, you were managing the apartments from A to Z. So, I understand that’s a new feature. How much do you charge in terms of commission for them? 

Shiny Cheng: There is no commission on that. They can just list on the website. It’s in the trial stage. We are just testing it out. Also, it’s not my main apartment renting business in China. The cash flow is coming from my existing apartment renting business in China. Currently, traffic isn’t much. But in the future, when we do more promotions, I want to create a handyman app so that if people have any problem in the house, they can order from the online marketplace in China. So, it’s a very simple MVP. 

Matthieu David: For people listening to us who don’t know, MVP means minimum viable product. 

Shiny Cheng: They pay service charges to us. We don’t charge any commission.

Matthieu David: I see. I want to make sure that I’m not missing anything from your business model. I feel that the rent for rental housing in China is not the only thing you provide. I am sure that you also provide other services. Am I correct that it’s more than just the rent for rental housing in China? I am sure that you are not only providing the place. Could you tell us everything you provide? What’s your value proposition? 

Shiny Cheng: We help with the product design and renovation for the owners. Usually, the apartments in the downtown are very ugly because owners are buying the apartments not to live in them but as an investment. So, we provide renovation and management for the landlord. We also provide handymen as well as cleaning services to our tenants. So, the landlord doesn’t need to take care of all the problems of the house. 

Matthieu David: I see. So, can we say that you provide cleaning and internet services? You have someone you can call for any issue which is happening. So, if someone has a problem with their washing machine or anything, you would be there to answer in Chinese and English. 

Shiny Cheng: Sometimes, the owners let us manage any problems the tenants might have. 

Matthieu David: So, the value proposition is on both sides. So, the tenant rents rental housing in China, and the owner of the apartment doesn’t have to care about anything.

Shiny Cheng: Yes. So, in the future, we can make money from both sides if they want maintenance service. 

Matthieu David: I see. I understand. In terms of client acquisition, you said you didn’t do any marketing. Actually, I went on your website and analyzed it. I used a software called SimilarWeb—I don’t know if you know it—and I found out that indeed your traffic on the website is not very high as you mentioned before. 40% of the traffic is people directly going on your website because they already know it. So, it’s not like a first acquisition. You get about 15% which are links sending you traffic and 47% from Google by doing research. This is data from SimilarWeb. Most people who want to find roommates in China find your website through research about the online marketplace in China. So how do you find clients? Usually, before I interview people, I get a good sense of how they acquire clients. But in your case, it’s much more difficult. How do you get your clients? 

Shiny Cheng: Yeah, that’s a good question. Actually, my website is MVP. It’s not meant for getting clients at all. Because I am not a tech person, I’m still looking for a technology partner for this roommates’ platform. I didn’t find one when I started. So, I didn’t do a lot of promotion and other technology-related activities on my platform. That was my weakness. So, in the beginning, we did some promotions on some international websites in Shanghai. It’s called Smartshanghai.com. And also, I was promoting on Facebook. But actually, to be honest, I think 80% of our clients are acquired through referrals. They are neither from Smartshangai.com nor Facebook. Only 20% are acquired from online marketplaces in China. My salespeople have been at my company for eight years. So, they have many connections. And their connections introduce clients to my company. We weren’t promoting on Chinese websites but we’ve started to promote in China. And now, so many Chinese love our apartments. Last year, we had 30% of our tenants being Chinese. But now, around 70% of people living in our apartments are Chinese. 

Matthieu David: Was it 30% last year or in the beginning?

Shiny Cheng: In the beginning, it was around 5%. The percentage of Chinese tenants in our apartments was less than 5%.

Matthieu David: So, within one year, there was an exponential increase in the percentage of Chinese tenants.

Shiny Cheng: In seven years, the number of Chinese tenants increased from 5% to 60%-70% now.

Matthieu David: I see. So young Chinese people working in Shanghai and not from Shanghai who are struggling to find apartments downtown and don’t want to live very far go to you because it’s much more convenient to share an apartment. It is safer going through you. I believe that’s also a value proposition you bring. 

Shiny Cheng: I think it’s also because the Chinese economy is improving and the salaries of young people are increasing. So, the apartments become more affordable. They want a good location, good quality, and good service in an apartment. And also, they want to find roommates in China someone who are international. 

Matthieu David: Interesting.

Shiny Cheng: I think most of my Chinese clients are also international who want to find roommates in China from other countries. Some are working with international companies. 

Matthieu David: I see. So, most of your apartments are in Jing’an which is one of the most famous districts where people want to live. It’s a very nice district but very expensive at the same time. And it’s very interesting when you say that people who want to find roommates in China from other countries—whoever they are, Chinese or non-Chinese—will tend to go to you. So, 70% of your tenants are Chinese, but you define them with an international mindset because actually, they may live with people from different countries.

Shiny Cheng: Yeah, exactly. Some Chinese told us since they had been studying in America, Europe, or Australia for four years, when they come back, it’s hard for them to have Chinese roommates. They want to find roommates in China from other countries. After studying abroad for so many years, they realize some cultural changes as well. So, the Chinese love us because of the international community. 

Matthieu David: I see. I am on your website at the same time, and I see the pictures. I feel that you made a lot of effort on pictures. Your story and what I see on the online marketplaces in China reminds me of two things. The founders of Airbnb found their first client because they advertised on Craigslist. So, let’s say they didn’t advertise on SmartShanghai.com, which is basically the same as Craigslist for foreigners here. So, they had to go through another platform to get their clients at the beginning because their platform was not very famous. That’s the first similarity I am seeing with your apartment renting business in China. The second point is that Airbnb took off when the pictures were good, bright, and beautiful. When I go on your website, I feel that you made a lot of effort on the pictures. Am I correct that you made a lot of effort on the pictures and so on to start rental housing in China? 

Shiny Cheng: Yeah. Exactly. Yeah. Every single picture is taken by a professional photographer. There are many clients who even say when they walk into the apartments; they are even more beautiful than they are in pictures. We really care about every detail. So, both the products and the pictures are good. Actually, the vacancy rate is around 4%. 

Matthieu David: The vacancy rate is around 4%. So, the occupation rate is 96%, which is extremely high. 

Shiny Cheng: It’s much higher than the average rate of around 50% in the industry. I think this is because of the quality of the apartment and photos. 

Matthieu David: To describe the apartments and the pictures I am seeing on the website to people who are listening to us and those watching us as well, you paint the apartments in different colors as well to create more volume, I believe. The furniture is modern and a bit vintage. You have paintings and photographs on the walls. They are well-decorated with flowers. The lighting is very colorful which makes the apartment much brighter. 

Shiny Cheng: Yeah, exactly. We really care about these details because our clients are young. They are mostly students or just working for a year or two. So, their salaries are not that high. They are probably paying half of their salaries for the rent of rental housing in China. In this industry, people don’t usually do the decoration of very good quality because that means higher costs. Because it’s a shared apartment, my clients can only afford around 4,000. If they could afford around ¥5,000, probably they would start rental housing in China to rent a single apartment. They will not rent a shared apartment. So, for us, if we improve quality, it means our profit margin will be lesser.

The owner of a popular Chinese platform even said what I am doing is very dangerous because he thinks that I spend too much money on decoration. Actually, he said, it’s quite a ridiculous industry. But now, many people in the industry are suffering. And I am very happy because I have a 96% occupancy rate. This is because of the investment I made in quality. Actually, it’s really paid off. Many people thought what I was doing wasn’t right because people were spending less on quality while I was spending more. To them, it wasn’t very healthy. Many people thought I was doing a very risky apartment renting business in China. So far, what I did has brought very good results. 

Matthieu David: And your apartment renting business in China is only in Shanghai and mainly in Jing’an. Is that correct?

Shiny Cheng: Yeah, mainly in Jing’an. It’s also in People’s Square, Xujiahui, and other places. Actually, there are many places, but 70%-80% of them are based in Jing’an. Other areas also have at least 100-200 rooms. 

Matthieu David: Got It. So now, I understand. You get a few of your clients on online marketplaces in China from third-party platforms such as smartshanghai.com and so on, but you get most of your clients through word of mouth. That’s what, at EO, we call Net Promoter Score (NPS). You have a very high Net Promoter Score. People recommend you. Right?

Shiny Cheng: Yeah, exactly. Also, we have sales.

Matthieu David: How does this work? 

Shiny Cheng: People who see the advertisements on websites come to see the apartments. Also, people who refer their friends take them to view the apartments.

Matthieu David: Okay. But these sales don’t generate new leads. It takes care of the leads, which are inbound or reaching out to you.

Shiny Cheng: No, it generates new leads. They promote our website on their social media platforms.

Matthieu David: I see. So, it’s more marketing than direct sales.

Shiny Cheng: Butwe don’thave much staff doing that. We have three full-time salespeople and two part-time salespeople.

Matthieu David: How many people do you have in your team? 

Shiny Cheng: They are 30 in total.

Matthieu David: 30. And you said that the main function is sales. I understand that it’s about 10%. Then you have decoration. Could you break down what the functions are in your team? 

Shiny Cheng: More than 70% of my team management in China are into product design.

Matthieu David: Product? 

Shiny Cheng: Yeah, product. I am referring to designers, project managers, and so on. Around 70% of my team is part of the product team. The marketing team makes up around just 10%. The product team makes up 70% of my team. The service team is around 30% of my team.

Matthieu David: Okay. Interesting. 

Shiny Cheng: Product comes top, followed by service, and then marketing. I am not doing a lot of marketing. Actually, I am terrible at marketing. 

Matthieu David: Before we started, you mentioned three challenges of doing business in China you are facing. One is the regulations. It will be interesting to understand why you mentioned regulations. Another one is cashflow. I think you already mentioned that. We understand why cash flow is an issue because you have to renovate before people start rental housing in China. That’s the cost, right? 

Shiny Cheng: Yeah.

Matthieu David: And the location is one as well. As far as I understand, to find the locations and maybe negotiating the contract are challenges of doing business in China as well. So, could you go more in-depth on those challenges of doing business in China?

Shiny Cheng: Location is one of the big challenges of doing business in China, especially in my industry. The economy of Shanghai is improving every year. So, people like going to Shanghai. It’s the number one destination for people from other cities. Every year, almost six million people are looking for apartments in Shanghai.

Matthieu David: Wow. So, it’s like 20%-25% of the population who are moving from one apartment to the other.

Shiny Cheng: Yeah, they are looking for apartments. People already living in Shanghai are moving apartments, and people now coming to Shanghai want to find a new apartment.  The apartment renting business in China, especially in Shanghai is very crazy. In the last three years, it’s been very easy to get investment from banks. It’s very easy to get money from investors because the market size is so huge. The needs are huge. So, many companies are coming up. Even bigger companies like Alibaba and Jindong are all investing in the apartment renting business in China. The last few years have been crazy. Generally, a lot of companies which are doing rental housing in China are coming up. So, the apartment renting business in China has been very competitive. Many rental companies are looking for good locations for apartments because the industry is very hot. 

Matthieu David: I see. So, a lot of companies are looking for the same locations. So, you have to fight to get them. That’s the challenges of doing business in China. 

Shiny Cheng: And because we are fighting for the same locations, the price keeps getting higher. I think in the last three years, prices of rental housing in China have almost doubled. When I first started doing this in Jing’ a which happens to be the best location, the rent of rental housing in China was only ¥7,000 but now it’s at least ¥15,000. So, in the last six years, it’s definitely more than doubled. This is because every year, about six million people are looking for apartments.

Matthieu David: So, the difficulty, I believe, is also to negotiate a 10-year contract because you have a 10-year contract with the owner. And you will certainly negotiate an increase in price as well. So, all those kinds of terms will be quite difficult to negotiate with as well. 

Shiny Cheng: Yeah. The owners are becoming very smart. So, they don’t sig for ten years. Now, it’s not easy to find apartments in good locations because while we want a 10-year contract, not many owners are willing to give us such contracts. 

Matthieu David: You mentioned regulations as another challenge of doing business in China. We know that you have a very different model from Airbnb. I understand that, but you are in the same space, which is rental housing in China. Actually, you rent places that you don’t own, which I think has a similarity to Airbnb. And we know that Airbnb is facing a lot of challenges of doing business in China in terms of regulations all over the world. They are facing challenges in the US. It’s the same in Europe and, I believe, in China as well. What specifically do you face in terms of challenges of doing business in China in regulations?

Shiny Cheng: In the beginning, regulations were tough for us because we always rented a three-bedroom apartment but there will be just one living room and a bedroom. It was not legal. But from 2013, government documents said this is legal which makes my apartment renting business in China open to everyone. Because our quality meets Airbnb’s standards, I am thinking about reserving 20% of my apartment rooms for Airbnb business as well because Airbnb has regulation issues in China. 

Matthieu David: Because it’s short-term and there are issues with short-term, isn’t it? 

Shiny Cheng: And also, I am thinking about having a co-living hotel or building. I am thinking about having one building for that, but there are regulatory issues. It’s easier to do that in Hong Kong than in Shanghai because Hong Kong has a smaller space. However, in China, the regulations are very difficult. Even if you get a hotel, you cannot do co-living apartments inside them. Maybe you can do co-working, but you cannot do co-living. There are so many regulations. 

Matthieu David: I see. 

Shiny Cheng: I was looking for co-living buildings to invest in, but it’s so hard to find one.

Matthieu David: How do you get informed of the regulations? Do you have a lawyer with you? Do you have someone in your team management in China looking at it or you do it yourself? How do you make sure they are up-to-date and you understand them?

Shiny Cheng: We have our industry group, so we talk about this a lot. We talk about Airbnb, capsule hotels, and different co-living buildings. However, for my kind of apartment renting business in China, we have no regulatory problems. I want to do a different style of co-living, like capsule hotels. While it’s okay in Hong Kong, it isn’t in mainland China.

Matthieu David: For people listening to us, regulatory breaches can totally change the business landscape in China. Some time ago, I saw shops and restaurants closed because they were not authorized to rent out to businesses. 

Shiny Cheng: So, I think regulation is a problem for scaling up. My current apartment renting business in China is okay. Everything is okay. I want to do more businesses, but regulations are my challenges of doing business in China.

Matthieu David: When you are starting an apartment renting business in China, you need an investment. Have you gotten any investment so far?

Shiny Cheng:  I have not gotten any investment.

Matthieu David: So, you own 100% of the company.

Shiny Cheng:  Yeah, 100%. I hope I can give my shares out. It’s better to get partners. Maybe in the future, if I need a roommates’ platform, I would need investment. I would need a Chief Technology Officer (CTO), a Chief Marketing Officer (CMO), and an investor for my platform. 

Matthieu David: Maybe, some people listening to us need to reach out to you to become your CTO and CMO. Before we started, you sent a document to me, which actually summarized your challenges of doing business in China and also, what you mentioned as your failure and lesson. In your failures, you mentioned not establishing formal management processes from the start. I understand that it’s important to have processes and training, but when you start, you don’t think about it because you think about the cash flow. You want to make sure that everything is going well. So, is it really a failure from the start? Is it not a failure when you develop it or when you move from 100 to 200 to 300 rooms? 

Shiny Cheng: I started my apartment renting business in China at 23 and I didn’t have any management skills from my university. I was studying Mandarin.

Matthieu David: You studied in Hainan, right. You studied on the island of Hainan, as far as I understand. You taught Chinese in Shanghai. You started as a Chinese teacher.

Shiny Cheng:  Yes, I started as a Chinese teacher. So, I had been a Chinese teacher for one year. It was my job. So, I didn’t have any entrepreneurship skills but I wanted to be an entrepreneur while I was at the university. I didn’t want to teach. In the University, I always dreamed of being an entrepreneur. So, after university, even when I was a teacher, I was into sales. I was looking for an opportunity to be an entrepreneur. Then I found this opportunity. So, I always wanted to be an entrepreneur but I didn’t have this kind of skill. I didn’t learn it in school. So, I learned it from my experience. In the first three to four years, people were quitting. There were factions within the team management in China and people were talking behind each other.

My team management in China was a mess. The culture was not good. The company process was a mess. We didn’t have many SOPs. So, I joined the Entrepreneur Organisation (EO). And then, I met many entrepreneurs. Some had 10 years of experience. Some even had more than 10 years of experience. They were very professional entrepreneurs who were very successful at what they did. So, they shared their management skills and knowledge, and I learned from them. Also, the whole E.O set-up is pretty amazing. I got a lot of training from EO, so I became very, very professional. Then, I started to establish my company culture. These are core values, mission, and vision of my company. I created the environment for my company. And then, I created many SOPs for the management of my company. 

Matthieu David: What do you mean by SOP? I am not sure everyone understands what SOP means. 

Shiny Cheng: It’s the process for each department. So, I learned it from experience and practice. So, now, everything is going in the right direction. 

Matthieu David: Who were the first people that you hired? You said that it was a mess in the first three years. Which functions did you hire first during the first two years? What did you hire them for? Did you hire them to decorate? Did you hire them to take the pictures? For what functions did you hire your salespeople? 

Shiny Cheng: Salespeople like the designer, project manager, and the QC. 

Matthieu David: Quality Control? 

Shiny Cheng: Yeah, Quality Control.  I also hired a finance team, service team, cleaners, handymen, and workmen. So, these were the people I hired, but I am not good at management. 

Matthieu David: How do you assess you are not good at team management in China? 

Shiny Cheng: Because people were quitting and always leaving. This is because the culture of the company was very negative.

Shiny Cheng: They were talking behind each other and complaining. I didn’t hire the right people. Also, the company process was not very organized. Actually, it’s my fault. Everything was my fault because I was not good at managing. In the beginning, I was working from 5 a.m. to 11 p.m. every day. Everything depended on me, and I didn’t know team management in China. So, I fired the whole team management in China, leaving only one person. 

Matthieu David: Really? Did you fire everyone except just one person? 

Shiny Cheng: Yes, because there was so much negative talk amongst them. So, I fired the whole team management in China.

Matthieu David: When was it?  

Shiny Cheng: Four years ago. 

Matthieu David: Just before you join EO?

Shiny Cheng: Before joining EO. Later on, after that, I joined the EO. I think it’s very good timing. And then, I started my new team management in China and chose people who had the same values as my company. I chose them very carefully. So, I hired very slowly and fired very fast. If I found they weren’t very good, I fired them very fast. When hiring people, I pay much attention to their values and attitude. I wasn’t paying that much attention to values and attitude earlier. After values and attitude, I look at their skills and experience or performance.  

Matthieu David: Interesting. 

Shiny Cheng: I also go to many places to learn. I visit the US and many other countries to learn more about entrepreneurship and management. 

Matthieu David: Where did you go?

Shiny Cheng: I just went to Malaysia for a master class. 

Matthieu David: With EO? 

Shiny Cheng: Yeah, EO as well. Yeah, I have had a lot of training from EO but I still need to practice more.

Matthieu David: I see. You said the biggest lesson is building culture and vision. You have already talked a little bit about it. Building culture and vision is the most significant change for my company. How did you build that? It’s very easy to wake up each morning and say “This is my vision and my culture”, but it should relate to what your company really is. So how did you build it? Did you build it because it’s what you want to be in 10 years, or it’s the mindset of your team management in China or it’s because of your own personality? How did you build this culture and vision? How did you define it? So, the key question here is how you defined it. 

Shiny Cheng: It’s a very good question. In the beginning, I chose around 3-4 key people in my team management in China, and then we had a meeting together where we worked on the mission, values, and core values of the company. And then I ask the members in team management in China questions like why they joined the company and why they are doing what they are doing every day. So, I will ask them these kinds of questions. Also, I will ask them what’s standing in the way of their success and how they plan to reach this success. So, these are the kind of questions I ask my groups. When they answer these questions, we are then able to define why they are working in the company. For example, if someone is working because they want to share the warmth and love, we get to know the personality of that person beyond apartment renting business in China. Through this, not only are we able to know about their brains but their hearts as well. We are working because we want to share love and warmth. So, we define our mission as sharing love and warmth. 

Matthieu David: I understand that. But did you find that it was a common point with all of them or you had very diverse answers? Were the answers similar or they were very diverse, and you had to re-work several times on the values?

Shiny Cheng: It’s called a strategy summit. We hold this meeting every year. Every year, we review our culture and plan for the culture and goal of the following year. Our first core value is gratitude. The second one is proactiveness. The third is to be first before any. So, these are our core values. Thirst for learning is also one of our core values. On Mondays from 9 am to 11 am, we dedicate that time for reading and sharing only. So, we’re really working on our values, and the people can feel that. So, when new staff joins, they can feel the culture. 

Matthieu David: Do you do the Monday gatherings with the entire team management in China or it’s in small groups? 

Shiny Cheng: Entire team management in China, but we divide them into different groups.

Matthieu David: You divide them into different groups, right? Okay. 

Shiny Cheng: Yeah, we divide them into three groups, which are the marketing, product, and service groups. They will then share the reading.

Matthieu David: I see. So, do you have books you suggest? Are they business books or novels?

Shiny Cheng: It could be any book but they are mostly professional books and also business development books. The manager or any staff can also recommend a book. Sometimes, we also watch a video or listen to the audio. We don’t always read books. 

Matthieu David: There’s one question I realize I didn’t ask you about the business model. What kind of contract do you sign with your clients? Is it the same as a typical lease contract in China? Do you pay one month’s deposit and then you pay for rental housing in China every three months? Do you have another system for them? 

Shiny Cheng: Usually, they pay one year. The second one is they pay 1.5 deposit and one month rent for per rental housing in China.

Matthieu David: So, they pay month by month, right? Three months by three months. 

Shiny Cheng: Yes, every three months. 

Matthieu David: I see. So, you have a little bit of cash flow issue on these payment terms. It’s not only about decoration. It’s also about the cash in and cashes out you have. But because the deposit is 1.5 months and you need to pay for the first month, you need three months. So, it’s 2.5 versus three months. So, you still lower the cash flow issue a bit with this deposit. I see. I understand. 

Also, you talked to me about your life motto. I’d really be happy if you could talk more about it. Could you explain to us further what your life motto is? It seems that you have invested a lot of energy, time, and thinking in your vision, values, and life motto. So, I’m pretty sure there is a lot behind this. Could you tell us more?

Shiny Cheng: I think this is very powerful. Energy is very powerful because when I was in university, I dreamt about my life today. This was my dream at the university. I grew up in a small village in China. 

Matthieu David: Where? 

Shiny Cheng: Gansu Province. There is a city called Lintan. After Lintan, there is a smaller city called Heshui. After Heshui comes to a small village which happens to be my hometown, it was very poor when I was living there. My whole family was very poor. Also, my parents left me when I was a child because my father didn’t want to take the responsibility of raising me. He gave me to my grandmother because my mother died when I was 10 months old. My father then married a new wife, and they left me. They almost didn’t take any responsibility towards me. My grandmother was also very poor. For one year, I didn’t have even have fruits. Buying milk and fruits then was very expensive. So, when I was a student in my hometown, I used to watch people who could afford fruits, milk, and everything else and I wanted to be like them. I still remember when my grandmother takes me to the city, and we would take the train. On the train, I was always the kid who couldn’t pay for the ticket, so my grandmother had to put me underneath her seat. All this while, I was watching other children who enjoyed time with their families. They could have snacks anytime they wanted.

During that time, I wanted to have all those but I couldn’t get anything. It was terrible. And it is for this reason that I really wanted to be an entrepreneur. I really wanted to get what I needed. I felt without. Even in school, I was the poorest. Amongst my classmates, the money I got every month was the lowest. So, I felt very ashamed at that time. So, when I was at university, I already had my dream. I was super certain about my dream of being an entrepreneur. Maybe, I could be a teacher or anything else but I was 100% sure I wanted to be an entrepreneur. And actually, it’s happening now. I travel around the world. I am free. I can do more apartment renting business in China. There are more opportunities in the future. Comparing then to now, it’s totally different. This is what I imagined when I was a child and also at the university. So, energy is a very powerful thing. 

Matthieu David: Do you think your past experience as a child living with very little still influences your decision-making? Do you think it influences you as well as not to take any investment but to stay independent and manage cash flow? Do you think it actually influenced positively your way of growing the company? Let me share my experience with you. In my case, I went to middle school in a somewhat deprived area. It enabled me to love people. When I was a student, I was teaching people from those deprived areas to be to gain admission to famous schools. That had a positive impact on my life because I was more generous. And I feel that, actually, that’s what you just said as well. In terms of management, do you think your childhood experience is still influencing you? 

Shiny Cheng: Exactly. Every single time. Every second. Yeah. I think that’s also why I am what I am now. My past shaped my present. I’m very ambitious. I want to do more apartment renting business in China. I’ve always wanted to be number one in my industry. I want to be the best. I don’t want to stop. I’ve always hungry for learning and more opportunities. This is because I was very needy during my childhood. Sometimes, I am also insecure. That’s why you said I don’t want investment. I don’t want to rely on someone. I always want to be in control. I am afraid of losing control when there is an investment. So, I think my childhood somewhat influenced this. I am 31 now. Before turning 30, I was always needy. But now, I feel like, actually, love doesn’t come from what I want. Love comes from what I am giving. So now, actually, I have started to change my mindset. I should embrace and accept myself. The most important thing, in the beginning, is giving to people. In my co-living apartments, I really want to give value first and then get the money back. But now, I am practicing more and more of this in my life. Also, I do Yoga and other spiritual activities. I do meditation as well. So now, I’m starting to learn how to give back.

Matthieu David: What are the next steps for Shinijia and also, yourself?

Shiny Cheng: Next step? A roommates’ platform for finding roommates in China. I have always wanted a platform. It’s very challenging for me. I find technology very interesting. I am learning. I’ve started to learn it. I am also looking at more real estate investments. I have also invested in a small coffee company. I also want to join a startup group. I want to learn how to invest. I would like to invest in some small, innovative, and interesting companies. Yeah.

Matthieu David: I see. Congratulations. I’m very, very impressed. I didn’t know as much of your apartment renting business in China that I do now. I am very impressed by what you did, your personality, and your company. I hope I can interview many more Chinese entrepreneurs like you. I really enjoyed the talk, and I think a lot of people did enjoy it as well. 

Shiny Cheng: My voice is not very good. 

Matthieu David: The content is perfect. The content is very interesting. 

Shiny Cheng: Yeah, I hope you guys can understand my poor English. My Chinglish. 

Matthieu David: That’s a great interview. Thank you very much. I hope everyone enjoyed the talk. Bye-bye everyone.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

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This article China Paradigm 50: Behind the scenes of an apartment renting business in China is the first one to appear on Daxue Consulting - Market Research China.