O2O business in China: Domestic Monopoly?

24Aug2015

China counts 618 million Internet users, double the total population of the United States. The Chinese internet ecosystem is the largest in the world but also one of the most isolated. Barriers between the Chinese internet and the rest of the world isn’t just a result of Chinese censorship of many foreign sites and services, but also from language and culture obstacle. As a result, Chinese business looking to build their own platforms and O2O business are in the rather enviable situation of having to purely adapt their product to the Chinese market with a significant advantage over foreign firms trying the same. Today, many online websites, mobile applications and tech services have surpassed the standards set by equivalent overseas businesses for domestic and even international performance. More than 350 million people regularly purchase online with Alibaba, 600 million people are monthly active users on WeChat, and 500 million people search with Baidu. Those numbers are rising quickly every month and opening unique opportunities which have radical effects on people’s habits and lifestyles. Baidu, Alibaba and Tencent are all three determined to forge change and develop global changes with O2O business in China.

Baidu, Alibaba and Tencent leading O2O business

Baidu, Alibaba and Tencent (BAT) have been fighting for cyberspace domination in the Chinese market for years, creating a large but not necessarily loyal user groups with much overlap. Baidu.com is the fifth largest website in the world, Alibaba’s value is over one third of Apple’s (despite a fraction of the international reach) and Tencent is the world’s 4^th largest web company measured by market capitalisation. Baidu has been focusing on search and portals, Tencent tends to orient itself towards social media and gaming and Alibaba remains the dominant power in ecommerce despite fierce competition from other companies like JD.com. All three are deeply interconnected, especially in their frequent acquisitions of O2O business in China. On average, Chinese mobile users spend over 2 hours on their phones every day, 60% of which is spent on an app affiliated to Baidu, Tencent or Alibaba. This suggests that on average, each person spends 736 hours per year in an experience created and curated by those tech companies. The potential for O2O is therefore profound; in total, BAT have invested $15 billion into O2O business in China according to Credit Suisse estimations and results can already be noticed. For example, BAT reports have shown people in China are on average ordering takeaway food 3 times per month, and far more often than this in urban cities. Their results also show beauty & cosmetic products along with car-ordering services are most frequently ordered online while group purchases and cinema tickets benefit from the highest penetration percentage among mobile users.

Online revolution from smartphone O2O business in China

Baidu has identified a new segment, termed Super Platform Apps, highly successful multifunctional applications offering several services: Baidu’s Mobile Assistant, Tencent’s Wechat and Alibaba’s Taobao are just three examples. Unlike in the US, the O2O business in China is growing more via smartphones to the extent that Alibaba’s revenues are now mostly mobile. Alibaba’s mobile revenues in the last quarter accounted for 51% of the company’s total China commerce revenue. Users have spent $60 billion in terms of gross merchandise volume after having increased of 225% year-on-year.

By investing into mobile websites companies are now able to reach their customers with more specific messages or positioning, and the results can be tracked more accurately. Mobile phones have the significant advantage of being activated all day and used very frequently. In order to have higher engagements from their mobile app users in O2O business in China, Tencent is keeping users on their app by diversifying its function. It is now possible to purchase goods or play games without even exiting WeChat. The company also suggests a practical payment method with its WeChat Wallet. This paying system was brought to WeChat to broaden its service, allowing the ordering of movie tickets, booking taxis and making restaurant reservations. One of the reasons for Alibaba’s success comes from the understanding of its users. Alibaba suggests very appropriate products according to previous purchases and becomes addictive. Alibaba is shifting more and more towards becoming a comprehensive O2O business platform. The interdependence and near monopolisation of services is pushing companies to choose one of BAT’s service spheres to build their services into, but there are alternative SPAs growing. For example, JingDong.com is shifting towards an Alibaba sales style and searching for ways to integrate with Tencent’s WeChat to make sales on mobile phones.

O2O business in China: Are the BAT unbeatable?

This strong technological block raises the question of the viability of stand-alone O2O business in China. Most competition has been falling into acquisitions by one of the BAT but this doesn’t mean the BAT dominance will continue indefinitely. The tech industry in China changes extremely fast, competition is high and quantities of money invested are huge, meaning the environment is still dynamic enough for competitors, with consumers ready to shift easily for better or cheaper services. Also, data centres are fragile to external event or hackers who could decrease confidence in a company’s services. Last week’s tragic Tianjin blast affected one of Tencent’s server rooms with repercussions on their service and sudden stock devaluation. Rewards of O2O business in China will have enormous returns but for now companies are fighting for cyberspace market share with important subsidies and discounts, artificially boosting demand. It is interesting to note that tech is easily imitated, so tech companies in China especially are bound to an extremely powerful need for innovation. The rising Chinese brand Xiaomi, often referred as an Apple rip-off has now has been copied in turn by another Chinese firm called Imitech. This Xiaomi imitation is experiencing good sales in Thailand.

The viability of independent O2O business in China remains possible as several companies are differentiating themselves. O2O business in China focusing on smaller groups and niche markets are seeing great results. Y1S is a car repair service, Zhaopin a job website and Kung Fu Bear a home massage service, and they are all installing themselves in comfortable niches and avoiding stepping on BAT’s toes while not sacrificing their own potential and viability.

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