Secondhand goods are probably the last thing that come to mind when discussing frontiers in Chinese tech. As conglomerates like Alibaba and JD rush to pour hundreds of millions into AI-driven pig farms and while President Xi Jinping calls for China to realize a toilet revolution that will replace the traditional hole in the ground with multifunctional bidets, recycling used products is a concept that many Zhongguancun entrepreneurs are unlikely to find exciting or profitable.

More to the point, recycled goods would seem to have little traction with the typical Chinese consumer, who is often generalized as voracious, status-oriented and thus drawn to brand prestige. Even as China condemned Canada for the arrest of Huawei CFO Meng Wanzhou last December, hundreds of Beijing shoppers queued outside in the freezing cold for the grand opening of a Canada Goose store. With such an unyielding hunger for luxury, it is safe to assume these urbanites would be ashamed to even consider buying secondhand goods.

However, given that the total population of Chinese living in first-tier cities is less than 100 million (not including the millions of migrant workers who live there), such characterizations of the “Chinese consumer” are woefully incomplete.

“[Chinese] media gives a distorted picture of consumer trends in China,” says 28-year old Yang Yuhuan, COO of Yuelin, a Beijing-based startup that is currently focused on China’s secondhand book market.

“They too often forget the majority of the population is living in second- and third-tier cities.”

China’s voiceless consumers

The success of e-commerce platform Pinduoduo is testimony to the power of tapping into a massive consumer base that is “voiceless,” to use Yang’s words. With 65% of its user base living in cities ranked third-tier and below, Pinduoduo’s gross merchandise volume surpassed the RMB 100 billion (around $14.8 billion) milestone in three years—two years faster than Taobao and seven years faster than Alibaba.

Pinduoduo’s low customer satisfaction and difficult traffic acquisition, however, also signal that tech companies have a fine line to tread between attracting a low-income consumer base and maintaining basic product quality standards.

Similar conundrums have plagued the handful of apps in the Chinese market dedicated to secondhand goods. Alibaba’s Xianyu and startup Zhuanzhuan follow a C2C model that leaves the platform at the mercy of wily sellers or even worse, counterfeit peddlers. As TechNode reported, JD-run Paipai entered the market in late 2017 with an automatic valuation system and a goods-identification process designed to minimize the risks inherent in the C2C model.

Yet issues with traffic acquisition remain, and e-commerce platforms that concurrently take on the role of handling the product—becoming C2B2C—incur significant costs due to storage fees.

Yuelin provides AI-driven solutions to all these problems. Rather than choosing between the low-cost/high-risk C2C model and the high-cost/low-risk C2BC2 model, Yuelin is focusing on optimizing the entire supply chain of the secondhand goods trade.

Drawing on a team of elite university students and experienced tech veterans, Yuelin is the only secondhand trading app that operates solely inside WeChat’s mini-programs, with no downloadable app of its own. Yang explains that this was a lesson taken directly from Pinduoduo’s struggles to retain users on its own platform.

More important, Yuelin has been able to harness data from secondhand book wholesalers and massive libraries such as Peking University to create a highly sophisticated valuation system that allows both buyers and sellers to get as close as possible to the “just price.”

“It’s only natural that the seller will tend to overprice while the buyer hopes to find underpriced goods,” Yang explains. “If we can find the ideal midpoint, both parties are more likely to use our platform again.”

Months of struggle went into getting Yuelin’s valuation system up and running. The startup had to let go of two CTOs before they found someone able to get the job done.

The wait was worth it. Yuelin’s scanning function conducts a quick multivariate analysis of any book, taking into account granular factors such as the wear and tear of the book page, courtesy of coding that allows the scanner to detect differences in color within a page; the more variegated the color, the poorer the quality of the used book.

Secondhand book wholesalers are among Yuelin’s target users. According to Yang, these businesses often run out of storage space, which they are unable to prepare for or quickly resolve because they lack information about local warehouse capacity. Their operational efficiency is further hampered because inventory management is not automated, requiring workers to manually input data into thousands of Excel spreadsheets.

Yuelin can now provide retailers in Chongqing and Wuhan with a real-time map depicting all the storage units available in their city, including constantly self-updating information on the amount of space available. The Yuelin database for Beijing is currently not as comprehensive due to the sheer size of the capital city, but Yang predicts that issue will be resolved within a few months. Moreover, the startup delegates wearisome tasks such as inventory management to the cloud, using AI to easily keep track of book titles and to ensure that warehouses have an adequate supply of a diverse range of titles.

First stop: Secondhand books

Marketing strategy also distinguishes Yuelin from its competitors. Rather than jump straight into handling all categories of secondhand goods, the startup has opted to focus on books as a way of creating a loyal user base. The enormous number of books in print and their low price per unit is what convinced Jeff Bezos in 1995 that Amazon should start off as an online bookstore; Yuelin has taken that strategy to heart, especially because books are among the secondhand goods most suited to reuse.

This strategy makes even more sense when applied to the world’s most populous country, which also happens to be deeply embedded in a Confucian value system that emphasizes the nobility of reading books, as well as a conservative education system unlikely to digitize anytime soon. Yang is unfazed by the effect that the normalization of online reading and e-books might have on this marketing strategy.

“No matter how convenient e-books or online material may be,” Yang says, “they will never be suitable for deep study and reflection in the way books are.”

Yang Yuhuan at work at Yuelin’s office in the Zhongguancun area of Beijing on a recent morning. (Image credit: Eduardo Baptista)

According to Yuelin’s market research, the Chinese used-books market is worth $1.2 billion, 80% of it centering on university campuses. While most Chinese millennials might be squeamish about buying a used Xiaomi phone, good-quality secondhand books are a boon to any cash-strapped university student; Yuelin’s research indicates that 70.3% of Chinese university students regard books as the most desirable secondhand good.

Part of the Tencent allegiance network, Yuelin has been building its brand credibility by lending fellow Tencent tributary Jingdong its unrivaled database to adjust the pricing of secondhand books being sold on the e-commerce platform. The ambitious startup, however, is more excited about Phase 2 of their development plan: creating a “Taobao” of secondhand goods that can collect all the high-quality but sparsely used goods of privileged first-tier residents and recycle them to less-picky consumers in third- and lower-tier cities.

“I have no doubt that someone [from a third- or lower-tier city] would be delighted to pinch a used iPhone in good condition from a rich city dweller,” says Yang.

It remains to be seen whether Yuelin is able to replicate Pinduoduo’s success in marketing itself to the “voiceless” majority in China’s smaller cities. Currently, the company’s users consist almost solely of millennials on big-city university campuses, a far cry from its prospective main user base.

However, China’s current economic slowdown might bode well for this young startup. Faced with skyrocketing house prices and tightening purse strings, one cannot discount the possibility that hard-pressed first-tier city consumers may start to give secondhand goods a thoughtful second look.

Eduardo Baptista is a Beijing-based Portuguese-Korean journalist and editor. His work has appeared in South China Morning Post, CNN, and SupChina.

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