Chinese tech giants burn cash and users are paying for it

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The speed at which Chinese tech companies are burning cash is disturbing. In order to maintain its dominating position, China’s massive service platform Meituan has spent over $4 billion in the past seven years. But O2O is not the only field that witnessed a fierce land-grabbing battle. Similar subsidy-fueled wars are going on in virtually every emerging market from ride-hailing to bike rental.

The prevailing model for a startup to prosper in the Middle Kingdom is to snap up market shares as fast as possible, often luring customer by providing massive subsidies and extensive marketing campaigns. Once they build their brand and clear up major competitors, they will have a final say in monetizing its users.

Before reaching a critical mass, in Didi’s case over 95% of China’s ride-hailing market, these companies are largely funded by venture capital and private equity firms, along with larger internet companies like Tencent and Alibaba. The rise of a raft of emerging tech verticals draw capital in and billion dollars investments are constantly hitting the headlines of local media.

Spoiled by abundant capital, the entire marketing strategies of some companies are formed around losing money. “2VC model” was jokingly coined in the craziest days of China’s fundraising extravaganza. Like customer-targeted business is shorted as 2C or ToC business, 2VC is  a term created for cash-burning startups that survive only by raise funding from venture capitalists instead of a sustainable profitability model.

However, two recent scandals surround China’s tech tycoons show that “VC welfare” is coming to an end in some of the more mature fields. Ultimately, users are going to pay for the tech unicorn’s sprawling growth.

Renting a home in China’s megacities like Beijing and Shanghai are becoming increasingly costly. The possible roles Chinese online real estate brokerage platforms have played in driving up the skyrocketing home prices sparked national outrage recently.

A Beijing landlord surnamed Cheng recounted his experience on a Chinese bulletin board about how Ziroom and Danke, another operator, had engaged in a bidding war for leasing out his apartment in the Beijing suburbs. While Chen had planned to rent out a 120-square-meter apartment for RMB 7,500 ($1,098) per month, the price was eventually raised to RMB 10,800 after the competitive bidding.

As one of the proptech unicorns in China, Ziroom takes out long-term leases of existing homes from individual landlords. The houses are then sublet to tenants, coupled with weekly cleaning, wifi, and other services. The company raised a whopping RMB 4 billion ($622 million) in January at an RMB 20 billion valuation. Its parent Lianjia, a residential brokerage, reportedly received RMB 2.6 billion in January 2017.

With abundant capital, Ziroom easily got a larger budget in striking deals with landowners in a bid to gain a larger market share. As the company gradually gain supremacy in the sector, however, they are under increasing pressure to show its profitability capacity. That means raising rents, but this will put the costs on the shoulders of their users.

Hu Jinghui, the former vice chief executive officer of another real estate agency Woaiwojia criticized competitors like Ziroom for acquiring apartments at above-market-value prices and then renting them out at even higher prices, Sixth Tone reported.

Ziroom denied its role in rising home prices in Beijing, claiming that the rental apartments only account for less than 5% of the rental market. It promised to put an additional 120,000 apartments on the market in an effort to stabilize prices.

In more extreme cases, the VC-backed fast growth and hasty monetization approach not only cost money but also lives. China’s ride-hailing giant Didi comes under fire recently after a second female user was being raped and murdered within four months. To worsen the case, a local report shows that there are at least 50 sexual harassment and assault incidents by Didi drivers over the past four years. The public backlash against Didi peaks when angry users called for the mass to delete Didi’s app.

“We raced non-stop, riding on the force of breathless expansion and capital through these few years, but this has no meaning in such a tragic loss of life. Throughout the company, we start to question if we are doing the right thing; or even whether we have the right values. There is an enormous amount of self-doubt, guilt, and soul-searching,” said Didi CEO and founder Cheng Wei and president Liu Qing in an apology released four days after the incident, admitting the company’s misstep in pursuing fast expansion and return while partially sacrificing user benefits.

Controversies about Didi’s measures to achieve profitability are nothing new. Earlier this year, the company was accused of charging higher prices to customers who it thinks will be willing to pay more, a kind of personalized pricing, or price discrimination, targeting at premium members.

But the company refutes price discrimination claim, saying that “Didi has never used its big data capabilities to disadvantage or bully regular passengers and will never allow price discrimination.”

While lots of China’s emerging markets are quickly maturing and vertical dominators are reaching the critical point to monetize. The experiences of Ziroom and Didi serve as cautionary tales for why we need to balance profitability and public goodwill.