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Article / 02 September 2015 at 5:32 GMT

Too many fingers in the O2O pie

China Watcher / Shanghai
China
  • O2O is an integral part of China’s technology and consumer landscape 
  • One problem with O2O however, is the insatiable quest for market share 
  • This is leading to platforms offering large discounts to users
  • This strategy won't help the industry reach maturity

By Neil Flynn

The Chinese O2O app Ele.me (饿了么, lit. Are you hungry?) has raised $630 million in funding, which pushes the firm’s valuation over $3 billion. This will help it to further rival the industry stalwarts Dianping and Meituan, as well as Baidu Food, which is gaining a large boost in market share after Baidu announced its intention to invest billions of dollars into its O2O business. 

The fundraising round was led by CITIC Capital, but also featured existing backers Tencent and JD.com. This shines a light on the huge effect that the BAT trio has in China’s tech scene, as they are able to back a whole range of startups, given their superior financial strength over rivals, which allows them to build a presence in a wide range of markets and industries.

Understanding the BAT

When a Chinese startup is able to raise such large amounts of money, one of the BAT tech trio is almost always an investor. The BAT trio: Baidu, Alibaba and Tencent, are the three biggest tech firms in China. From the outside looking in, it’s very easy to describe the three firms in terms of comparable US rivals: Baidu being the Chinese Google, Alibaba being the Chinese Amazon, and Tencent being the Chinese Facebook. 

The problem is that this is a far too simplistic way to view these firms, because in reality, they are rivals in almost every aspect of the technology and consumer industries, either through their own services, or through investment in smaller firms.

Tencent’s investment in Ele.me isn’t its only O2O presence. It has invested heavily in Dianping, which is the major O2O platform in China, and through its 10% stake in online shopping platform JD.com, it has exposure through the JD At Home O2O app. In addition, Alibaba has invested in Meituan and Koubei, while Baidu has its own proprietary O2O platform within its ecosystem. 

This shows the influence that the BAT trio have within the industry, because while the market leaders may look unfamiliar to those outside China, it should be of no surprise that the BAT have fingers in the O2O pie.

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 Food for thought ... offering discounts is not the best way to build
and maintain a user base. Photo: iStock

Potential outlook

As much as Chinese firms are raving about the potential of the O2O industry, a major problem is that the insatiable quest for market share is seeing platforms offering large discounts to users. When ordering food, the quoted prices are typically the same as the restaurant price, if not slightly cheaper. However, if you use an online payment platform to pay the bill, such as Alipay or Wechat Pay, you receive a discount of around RMB10. 

In addition, repeat users receive further discounts in order to keep their business. Therefore with the typical order size being RMB30 per person, the final bill is then reduced by more than half. As an example, I have regularly used Meituan for food delivery, simply because users receive RMB5 off their next purchase. However, this has changed recently, and the discounts tend to be RMB1, if at all. This comes at a time when Baidu Food and Ele.me are both offering large discounts, and I have subsequently started using these platforms.

This has major parallels with the taxi hailing app market last year, where Didi and Kuaidi were offering large subsidies to both passengers and drivers to use their respective app. The problem that I flagged at the time was that the haemorrhaging of cash to build market share among a fickle user base isn’t sustainable. 

Both taxi apps offered exactly the same service, so the only deciding factor between the two was the discounts available. In the end, the two apps merged into one in order to challenge Uber, but this likely won’t happen in the O2O business. There are four or five major players in the industry, offering exactly the same service, so it is difficult to see how the industry can mature to the point where the only way to build and maintain a user base is to offer the best discount. 

That being said, O2O isn’t slowing down and will continue to be an integral part of China’s tech and consumer landscape. 

– Edited by Gayle Bryant

Neil Flynn is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform

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