Sample Case Study on Doing Business in China

Doing Business in China: Airbnb

Introduction

China has become a global economic phenomenon with its market being among the most important. Its increasing position in global business makes it integral to undertake business in China (Feldman, 2014). With $7.3 trillion 2012 GDP and projected growth, it is the second largest economy after the U.S. and thus a market where companies are looking for growth and especially on mobile phone supported platforms (Shostya & Morreale, 2014; Kokalitcheva, 2014).

The emergence of a new phenomenon dubbed ‘sharing economy’ has heralded a new dawn in business, more so on online platforms. According to Kelly (2014), the sharing economy, with its various labels, describes an economic system that shares human and physical assets. What the sharing economy is hinged upon is the premise that when resources are shared, they not only are allocated more efficiently but they also gain value as more people and businesses have access to them (Kelly, 2014). Simply, in the ‘sharing economy’, unused resources are considered wasted value.

Airbnb: Entry into China

Airbnb is a company that operates with the same philosophy on the shared economy platform. Airbnb transactions involve peer-to-peer online review and rental of accommodation and other rental products. On its website (www.airbnb.com), the company has two simple log-in options for its users; to rent unique places to stay (from local hosts in more than 190 countries) or listing their own rental space.

The company is located in the USA with various branches spread throughout the world to reflect its global presence (Pasick, 2013). It has been able to operate from the U.S. and its branches to reach more than 190 countries. Their next frontiers are the Asian countries, specifically into China, where they are yet to make an official entry.  According to Kokalitcheva (2014), quoting the product manager, Airbnb has with its existing business model experienced remarkable success in the U.S. and most of the Western countries, but doing well in China is considered a game changer as it will require the company to review its tactics before entering the Chinese market.

This paper will try to highlight some of the challenges that may arise during Airbnb’s entry into China. Further in the Chinese context, Tujia (representing the face of competition in China) – and unarguably the biggest competitor to Airbnb, will be referred to in order to put things into perspective.

*How should they differentiate themselves from current Chinese offerings? 

In the Chinese market, there are other ‘shared economy’ companies that operate in the same sphere/ area of interest in which Airbnb operates in, that is, the rental and accommodation of unused property spaces. Such properties are listed by their owners (hosts) for use by guests (tourists and other travelers). According to Cheung (2014), the main competition to Airbnb will come from the local Chinese company known as Tujia. The Chinese competitors have mainly dwelt on availing free space though this is not mostly a peer-to-peer service. For instance, Tujia offers the very service as Airbnb that allows users to avail their properties to be hired out as vacation or business rentals (Cheung, 2014). The differentiating factor though is that Tujia deals with property developers and later buyers where they manage and maintain the properties for their customers (Papuc, 2014). Airbnb is mainly based on peer-to-peer interaction and probably this has more appeal to the Chinese considering their unique social connection especially one that is known as guanxi. According to Feldman (2014):

“Guanxi is a socially intense system of informal relationships that undercuts and reverses formal Chinese institutions, is itself a subcategory of the central principle of Chinese culture, hierarchy. Guanxi, in a word networking, connects the individual to a social network of “friends” who can be called upon for favors when needed”                                                                                                                                   (Feldman, 2014)

There cannot be a more opportune avenue for Airbnb to exploit in China than through guanxi. The model that Airbnb runs is more in line with the business model and is therefore more easily corresponding to Airbnb’s model than the one being used by Tujia. Tujia incorporates even institutions, something that guanxi seems to want to circumvent.

*Who would you recommend they partner with (if anyone) for help on entering the market or any other aspect of their business in China?

Most probably, the best way to enter the Chinese market will be through a local business partner/host. This is through the realization that on most parts, “the government is authoritarian and makes extensive if not enormous demands on business, some portion of which can be classified as abuse of power”, says Feldman (2014). This is more so on foreign businesses and most especially true for Western based countries and in particular American businesses.

Most preferably, the best approach will be through a joint venture mirroring the approach taken by Tujia as shown by its American shareholding of a similar business partner HomeAway Inc., which is an American company and operating in the same space. In addition, the ability to create connections with other influential domestic players will need to be nurtured. For instance, Tujia is affiliated with the biggest online booking stage in China, Ctart.com. This is the very path recommended by Hayes (2013) who advises joint ventures as being the top market-entry strategy in China. According to a survey on the subject of technological businesses in particular, most respondents approved joint ventures as the most successful means into China (Hayes, 2013). The main reason was given by Hayes (2013), that joint venture are indispensable to finding the way through the governmental and cultural hurdles to market entry. In China, a joint venture works for a foreign country as they get preferential treatment from authorities under a special policies framework set up by the Chinese government (Hayes, 2013).

*How else should they adapt their business model to China?

In China, there is a way businesses, people and society in general operate that is far much more different from how most Western countries operate. Their business practices, cultural and ethics vary widely from those in America (Feldman, 2014). Take for instance the guanxi model, and how it influences interactions. Their model can be used to tap into these widely accepted influential cultural norms, and as noted by Airbnb’s executives, by changing their product to suit the Chinese market. Without a doubt, it will require input from the locals, but this can be infused with the world best practices.

For such spaces that are inhabited and have openings only during specific times, unlike second homes and such like properties that are available all the time, Airbnb will have the upper hand as their business model seeks to attract such listings. It has been noted that Chinese competitors are mainly focused on availing unused properties to the market and most preferably the properties have to be taken care of by the listing company (Papuc, 2014). This in itself is a niche in the market and there is the larger uncharted territory, the average Chinese who does not have idle property and still wants to make money with the property they may be currently occupying. Moreover, a guest that stays overnight can be taken care of better with a live-in host than one who remains anonymous, something that probably does not auger well with the Chinese as they place importance on social interactions (Feldman, 2014).

*What political risks do you anticipate (if any) and how would you recommend mitigating those risks? Are there ways to align this product with the goals of the Chinese government?

China usually undertakes political changes once in every 10 years and the last changes occurred in 2013. 2014 marked the second year of political control and power for the current government with subdued political games and machinations until 2017, when those who will have attained a prescribed age limit will be expected to get replaced (Scissors & Cheng, 2013). While this kind of political setting assures gross stability, it gives little indicators for subtle political changes. Mostly, the way China interacts and behaves on the global stage will require hard reading and patience for those interested. However, Scissors & Cheng (2013) have established that the unprecedented growth that has been established and now well known of China has created a surplus of liquidity that will force the political class to institute market practices that favor consumption. According to Scissors & Cheng (2013), “China would become a better economic partner, in particular putting its consumers first and allowing more foreign trade and investment access to the home market”. What this portends for Airbnb is the possibility of better business climate/environment in which it can play in.

However, that being the scenario, Scissors & Cheng (2013) do clearly state that much of the business community misunderstood the last political transition and paid the price, as the open China anticipated by some analysts never materialized. In essence, owing to the controlling nature of the government and expected slowdown in internal investments and spurred planned growth, business must prepare for further, slow regression toward a command economy (Scissors & Cheng, 2013). This being the case, and as earlier highlighted – further recommended by Scissors & Cheng (2013), “The companies that will outperform are those with the best information and the most flexibility”. This means residing or becoming directly involved in China, instead of becoming aware of developments afterwards and being able to amplify or diminish investments when the new government’s intentions happen to be comprehensible (Scissors & Cheng, 2013).

*What other key operational risks (legal, safety, cultural and other differences in management, business cycle exposure, etc.) do you see and how would you recommend mitigating those risks?

Invariably, there is the elephant in the room when it comes to cyber-security and cybercrime in China. According to Kshetri (2013), these issues are closely connected with a range of key ideas related to e-commerce like web trustworthiness, information control and privacy, which have an effect on users’ perception of e-commerce providers as well as the broad environment. This poses a risk as the reach of the cyber-related crimes target especially Western companies and may compromise networks and sensitive data (from financial transactions). Airbnb will do well to invest in stronger network security systems and put in place measures to protect its systems and the data that they have, possibly for China and the rest of the world.

Airbnb should also be in a position to address one of the main worrying and concerning trends for American firms that want to have a slice of Chinese business. According to Hayes (2013), whereas foreign firms are being persuaded to invest in China, such firms have to contend with intellectual property and technology transfer risks as a result of the Chinese wanting to build local capacity. In similar breadth, Savitz writing in the Forbes magazine highlighted the most important predicament that is facing American businesses, especially in relation to Chinese engagement is the latter’s aggressive efforts to steal American intellectual property (Savitz, 2012). This is partly due to the pressures that are now being exerted on the Chinese economy to shift from being the maker of ‘other people’s products’. According to Taylor (2011);

“China, as the workshop of the world, has benefited from foreign direct investment but protectionist barriers in Western countries are forcing a move from labor intensive to high tech products. To remain competitive, Chinese industry must move up the value chain, a process that requires innovation leading to independent product development”                                                                                                                                   (Taylor, 2011)

What this means to Airbnb is that, their engagement with their Chinese counterparts has to be of a more cautious nature. Taylor (2011) advises increased investments in data security and the guarded adoption of technologies such as cloud computing and other such initiatives that allow unrestricted access to data, the very information that is the foundation of their business. The measures that Taylor (2011) advocates for are, “Companies vigilantly defend their intellectual property and make it much more difficult for China to steal their ideas – if they step up and secure their data”. Organizations require understanding what data is mainly significant to business achievement, who in the business has right of entry to that information, where it is located inside the company, and significantly, where it moves, and how it is protected at every step (Taylor, 2011).

Tujia and other would-be competitors have made some considerable strides in ensuring that they boast of business to business (b2b) relationships that may work against Airbnb. In the case of Tujia, such an important connection is with Ctrip.com, which apart from being a shareholder is also China’s biggest online booking website where Tujia lists its properties (Papuc, 2014). The chances for Airbnb to have such a relationship with Ctrip.com or any other large online booking player within China are rather lean. Also, it should be noted with concern that Airbnb will be facing a sterner situation when it takes on Tujia and the Chinese market. Chinese companies like Tujia already have important domestic b2b relationships and on the international front, it has also partnered with Airbnb’s domestic competitors such as HomeAway Inc. (another Tujia shareholder/investor), the main competitor of Airbnb in the U.S. and other western markets. These b2b relationships will probably yield combined synergy that will make Chinese competitors more than formidable business foes and literally give Airbnb a run for its money.

There is still the risk that exists in the cultural and ethical ways of the Chinese that remain alien to Westerners. In their very concise and informative paper, Shostya & Morreale (2014) interview young people (students) from the U.S. and China on their views of the other country. Even though they are considered young and the future of their respective nations, there is an agreement over a bleak future with the future for collaboration between the China and the U.S. uncertain as a result of very different cultures and historical philosophies of the two nations. This opens room for concern and will require continued investment and formulations of China specific strategies in the business operations of Airbnb. Probably, the best way to deal with this is to heed Hayes’ (2013) remarks, “the Chinese value cultivating relationships and depending on the product or service, businesses may need to make early investments in these relationships, far before proceeding with their market entry”.

Conclusion

Doing business in China is not all gloom, there are various positives and though they may not be overtly visible to the newcomer, they are existent and a business will flourish. Past the initial entry phase, it has been widely quoted that risk taking in China has returns on investments and other benefits that are among the highest in the world and way above the global averages. Nevertheless, as Hayes (2013) sums it up, to fully identify and exploit all the favorable features, firms need to get hold of intelligence on both the marketplace and their potential stakeholders and customers.

 

References

Cheung, S. (2014). China’s Answer to Airbnb, Tujia.com, Raises $100M. WallStreetJournal.com

Feldman, S. P. (2014). Trouble in the Middle: American – Chinese Business Relations, Culture, Conflict, and Ethics. International Journal of Organizational Innovation, 7(1), 6-14.

Hayes, C. (2013). Developing a Smart Approach to Market Entry for American SMEs. China Business Review, 40(1), 52-53.

Kelly, B. (2014). The Bitcoin Big Bang: How Alternative Currencies Are About to Change the World. Hoboken: Wiley.

Kokalitcheva, K. (2014). Airbnb explains how it’s going to win in China and the rest of Asia. venturebeat.com

Kshetri, N. (2013). Cybercrime and cyber-security issues associated with China: some economic and institutional considerations. Electronic Commerce Research, 13(1), 41-69.

Papuc, A. (2014). China-Style Airbnb Driving Home Purchases on Profit Promise. Bloomberg.net

Pasick, A. (2013). Airbnb sets its sights on the Chinese tourism boom. qz.com

Savitz, E. (2012). How American Businesses Are Giving Away Ideas To China. Forbes.Com, 23.

Scissors, D., & Cheng, D. (2013). Preparing for the New Chinese Government. China Business Review, 40(1), 38-43.

Shostya, A., & Morreale, J. (2014). U.S.-China Economic and Political Relations: Youths’ Perceptions. International Advances In Economic Research, 20(2), 189-202.

Taylor, R. (2011). International business in China vis a vis the global economic crisis: introduction. Asia Pacific Business Review, 17(4), 403-410.