China's start-ups in the online-to-offline (O2O) industry have experienced some difficult days in 2015 as several companies have died this year, and more may follow as the once prosperous industry deteriorates.
Quite a number of O2O start-ups in a dozen areas, such as online community, online travel and online education, have disappeared this year. This miserable scene has surprised the public because of the numerous media reports in the past saying that the stars of these O2O companies have raised substantial venture capital funding, with some even giving timetables for IPOs.
Burning money
The public has also seen the fierce competition among O2O start-ups over the past few years, especially in car-hailing, group-buying and online takeout services. China's car-hailing giants, Didi Dache and Kuaidi Dache, once claimed that they each had spent more then 1 billion yuan ($157 million) to gain market share in 2014 before they announced their merger in February 2015.
Group-buying giant meituan.com was widely said to have, until now, burned through $700 million that it had raised in January, according to media reports.
Ele.me, one of China's largest online takeout services, accounted for 37.6 percent of the market share in the white-collar business district in the first half, according to an Analysys' report released on July 30.
Yet the company has suffered great financial losses due to its substantial subsidies, which have caused ele.me to lose 7 yuan to 8 yuan on average for each order, the Beijing Youth Daily reported on September 7.
Analysts say most of the wild spending goes toward subsidies to encourage users to place orders through the service. These subsidies are considered an effective way to help O2O start-ups quickly attract users and expand market share, which in turn helps them increase sales and obtain more venture capital.
Meng Zhaoli, chief economist at the Tencent Research Institute - a subsidiary of Tencent Holdings Ltd that focuses on the Internet industry - noted that this kind of spending is essential for O2O start-ups, and has become an implicit rule in the industry.
"O2O start-ups need to give subsidies or burn money in other ways to attract users because it is difficult for them to keep ahead of their competitors by merely relying on software or business models that are often similar among peers," she told the Global Times Tuesday.
In Meng's view, the number of users is key for O2O companies.
Hidden dangers
When the capital market is hot and venture investors are generous, O2O start-ups can spend money without much serious consideration. But when the capital market cools down, it is not so easy for them to live the days.
The Internet industry raised about $3.79 billion from venture capitalists and private equity firms in the second quarter of this year, down 50.36 percent quarter-on-quarter, with the financing cases down 10.84 percent on a quarterly basis to 222, according to a report released by the Beijing-based ChinaVenture Investment Consulting Group in July.
Many experts wonder if the more difficult financing conditions will force O2O start-ups to the suspension of subsidies, which would likely lead to user losses and leave these companies in a life-or-death situation.
But Meng said that the inherent law of the O2O industry itself is a more of an influential factor than capital.
"It is a universal law that there is explosive growth in some areas of O2O in the early days, with many start-ups crashing in, followed by a reshuffling in the industry that causes many start-ups to die," she said.
"After that, industry will step into a period of steady development."
Meng also stressed that it is unscientific to conclude that the entire O2O industry is in a life-or-death situation.
"Different subdivisions fare differently," Meng said, "Car-hailing, group-buying and online takeout services remain promising now."
But she didn't mention which areas of O2O are in decline to avoid a conflict of interest, because her employer's parent company Tencent has made substantial investments in the industry in recent years.
Tencent invested more than $2.5 billion in O2O in 2014, covering areas such as local life services, car-hailing apps, medical treatment and e-commerce, cnstock.com reported on March 5.
Meng noted that start-ups in the same areas of O2O face similar financing challenges.
"When the capital market is hot, these start-ups are inclined to burn money to attract users, but when capital is scarce, they will be more cautious about spending money, turning to competition in other areas such as improving services and the construction of their software and hardware."
"Capital is more like a catalyzer," she added. "It can only play a role in pushing the O2O industry to develop faster or slower, but can't determine the life or death of the industry. Market demand ultimately decides this."
Meng said that the reshuffling is faster and more cruel in the information economy than in the traditional economy.
"Only one or two giants will survive in the end in the O2O industry," she said.
"The Matthew effect [A phenomenon in specific circles whereby one's accomplishments and reputation tend to snowball, and those with meager accomplishments have greater difficulty achieving goals] is more obvious. The largest one or two companies will attract the most users and capital."
