Airbnb – American losing streak

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Airbnb unlikely to win in China.

• Airbnb, like Uber and Amazon before it, has fight on its hands when it comes to the Chinese market meaning that it will have to do something very different to break the current losing streak.
• Apple is the one exception which I think is due to its brand strength with Chinese consumers and the fact that its success in China has not really come at the cost of local companies.
• Although Airbnb dominates the global market for short-term private rentals, it is relatively small in China with around 80,000 properties available for rent.
• By contrast, local competitor Tujia.com (which shares listings with Ctrip.com) has 400,000 and an additional 300,000 low cost listings.
• The smaller local player, Xiaozhu.com, boasts 200,000 covering 300 cities which combined with Tujia.com, dwarf Airbnb by a factor of over 5 to 1.
• Furthermore, these local competitors are well financed having closed significant funding rounds recently with plans for more as they grow.
• Airbnb, Amazon and Uber are all network based businesses meaning that, to make money in any one market they need to dominate it.
• The rule of thumb that I use to judge when this can happen remains as follows:
• To make money, a network business needs to obtain at least 60% market share or be double the size of its nearest competitor.
• Once this has been achieved that market place will have become the go to place to buy or sell something.
• That way, buyers will become less price sensitive on that market place and the market place can charge sellers more to transact there.
• There are some doubts with regard to how many of the listings on the local sites are ever rented, but even if it is a small percentage, the locals are still likely to be bigger than Airbnb in China.
• This is why I suspect that Airbnb tried to buy Xiaozhu.com last year as this would have given it a critical foothold from which to grow into the dominant position that it needs to become viable in China.
• The local players also appear to have a better feel for the demands for domestic customers while Airbnb does much better with foreigners coming into China for business or tourism.
• Hence differences in the requirements and language between local and foreign renters will keep the local companies from turning the screws on Airbnb for the moment.
• However, once they are established for domestic renters, I can see them quickly turning to embrace non-Chinese users and as ever, they will be brutally price competitive.
• I think that this gives Airbnb some time to build a local presence but given the difference in vlume between domestic and foreign rentals, it is unlikely to dominate the market without competing directly with Tujia.com and Xiaozhu.com.
• This is when the blood-letting is likely to begin and given the experience of Uber and Amazon it is not going to be pretty.
• Given, that Airbnb appears to be already way behind in the market for domestic rentals, this looks like a fight that it will not win meaning that it will end up selling its China operation to one of the local players.
• I doubt that Airbnb will be the one that breaks the American losing streak in China.