What Will It Take For A U.S. Startup To Win In China?

China is an alluring destination for U.S. tech companies. Its massive population is more tech-enabled than ever and there is room to grow. And if you’re an American tech company that has made it in China, you can probably make it anywhere. But, as our coverage of Chinese startups suggests, most American consumer tech companies have charged into the country with high hopes—only to be defeated by local rivals.

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We’re going to look at some of those failures through the lens of some crucial mistakes and challenges that are unique to China’s startup ecosystem. In particular, we’ll address how startup culture, systematic differences, and flexibility have played a role in many companies’ ultimate demises in the country.

Language (And People) Matter

Though it may not seem like rocket science, a critical issue facing U.S.-based consumer technology startups aiming for China is the importance of people and language. One of the most glaring examples of this oversight is Groupon’s sad attempt at beating its own copycats in China.

In 2011, Groupon entered a joint venture with Tencent called Gaopeng to fend off these copycats. Groupon believed it could succeed in China by busting in with wads of cash, applying its previous experience in other global markets, and playing up its partnership with Tencent.

However, despite having Tencent’s knowledge and expertise at its fingertips, Groupon’s Gaopeng was blasted in the media for being completely detached from the linguistic and societal realities of China’s market.

According to a Tech in Asia report written at the time, Gaopeng’s team used email marketing campaigns to reach out to its audience in a market that largely skipped reliance on email and went straight to mobile platforms like WeChat. The report also criticized Gaopeng for “insist[ing] that its partnering vendors split profits 50-50,” going against traditional relationships in which vendors usually have more control.  To make matters worse, back in the U.S., Groupon released a 2011 Super Bowl ad centered on Tibet, revealing Groupon’s complete disregard for political considerations in ramping up for a launch in China.

(Crunchbase News reached out to Groupon for comment. The company did not respond by the time of publication.)

In 2011, Tencent pulled the plug on the Gaopeng site just one day after its launch. A year later, Tencent initiated a merger with Ftuan, another China-based and Tencent-backed group buying company. That merger also failed to take off.

Misunderstanding the importance of language and business culture is a basic mistake that U.S. companies can make whether it’s moving into China or another global market. And while Groupon’s oversight on that issue could happen anywhere, other companies have faced very China-specific challenges.

Capitalism With Chinese Characteristics

Unlike Groupon, Uber did attempt to tailor its efforts to the Chinese market, setting up a separate Uber China with a Chinese name (Youbu), storing data within the country, accepting an investment from Baidu, and integrating Baidu maps into the Uber app.

Uber’s experience in China is a testament to the risks that late-stage U.S. companies take when trying to appeal to the Chinese market. China’s ridesharing conglomerate Didi-Chuxing was backed with billions in cash from Tencent and China Investment Corporation (CIC). The combination of capital and support by leading Chinese corporations and state-controlled entities proved effective in its competition with Uber.

Veronica Wu, the founder and managing partner of Hone Capital, the U.S. arm of Chinese venture capital firm CSC Group, told Crunchbase News in an interview that the government role in allowing risk and encouraging investment is central to the China equation.

“What you see is this concentrated investment in selected verticals, whereas in the U.S. […] it is very much so based off of the individual willingness to take risks,” Wu said. “You have a government who basically underwrites a part of that risk saying, ‘we’re going to invest in these sectors,’ which attracts more private dollars into those segments.”

As a result, Uber could not sustain the high cash burn resulting from the subsidy war with its China-based rival. After two years in the country, and $2 billion dollars spent, Uber sold its China operations to Didi Chuxing for a 17.7 percent stake in the company.

It is clear that understanding China’s system of state-based capitalism is key to weighing costs and benefits. Chinese startups, copycats or not, will have the funds and the connections to push U.S. startups out of the game.

But even with companies like eBay, Google, Uber, and Groupon admitting defeat in the country, one U.S.-based unicorn is determined to make it work.

Doomed To Repeat?

Airbnb wants to take China on its own terms.

The firm initially focused its efforts on Chinese individuals travelling abroad, but in 2017, the company launched a separate, domestically-focused operation called Aibiying. Airbnb stores its data within China to comply with data transfer regulations, and the company has left important decision making power with the executive leadership of its China branch. The company told Crunchbase News in an email that it has established memorandums of understanding (MOUs) with multiple local governments.

These days, however, Airbnb faces competition with Alibaba-backed Xiaozhu, which has raised $271.6 million, according to Crunchbase. Tujia, Aibiying’s other competitor, is backed by Ctrip, China’s leading platform in the travel industry, and has raised $755 million, according to Crunchbase.

Though Airbnb has made significant progress in learning from past mistakes, it has stopped short of joining with a Chinese partner to maximize its reach. Airbnb attracted a lot of attention last year when it turned down a deal to combine forces with its local Chinese counterpart Tujia. This decision has been criticized by journalists and Tujia alike.

Wu told Crunchbase News that joint ventures in China can be an overlooked strategic importance when it comes to doing business.

“There are ways to partner that could potentially bring very interesting benefits to a company,” she said, pointing to the joint venture experiences of Motorola and GM in their early days in China. “There are certain things where it’s better to have a local partner to do it, and there are certain things that international companies can bring that are valuable.”

In the case of Airbnb, it would seem that a partnership with Tujia could be beneficial to the company. For example, Tujia has taken advantage of empty apartment buildings left by the national housing boom. Tujia has also based its amenity-based, hotel-style experiences on what it believes are Chinese vacationers’ preferences. Meanwhile, Airbnb is taking China slow and steady while staying dedicated to its host-based branding. That brand persistence could prove to be the Achilles heel in its future development in China.

“The problem with companies waiting too long [to enter China] is that they are so indoctrinated in their existing way of operation,” Wu said.

Even so, Airbnb is confident that its operations in China will succeed.

“As the company’s fastest growing domestic market, Airbnb continues to invest in the China travel market,” an Airbnb spokesperson told Crunchbase News in an email. “By 2020, more Airbnb guests will come from China than any other country. We will continue to deepen our commitment with the goal of bringing authentic magical travel experience to Chinese travelers. ”

In entering China, U.S. companies have attempted to straddle the line between remaining true to its U.S.-centric brand and politics while simultaneously adjusting to China’s system. What past failures have revealed is that startups shouldn’t enter China with a half-baked strategy. If startups want to cash in on the opportunities available in China, flexibility in adjusting to the realities of the market, the government, and the venture system are potentially the key to success.

Illustration Credit: Li Anne Dias