Strength in Numbers: Opportunities in China’s Sharing Economy

July 6, 2016 Posted by China Briefing Reading Time: 6 minutes

By Cameron Turnbull

Advances in mobile technology and mobile app development have given rise to a new business model that has already had a profound effect on the transportation, e-commerce, and lodging industries. The sharing economy refers to third party online service providers that help businesses and individuals turn excess supply into revenue by linking them to consumers via various online platforms. With high levels of mobile use and a rapidly expanding consumer class, China has been quick to adapt to the sharing economy, presenting tremendous opportunities for those who embrace new technology and business models.

An Introduction to the Sharing Economy

Enterprises in the sharing economy create value by monetizing surplus resources. Take Airbnb for example: the San Francisco-based startup quickly became a global phenomenon simply by providing a platform where users could earn extra income renting out their unused rooms. The company identified an underserved market in the budget traveler, and linked them to a previously under-utilized group of suppliers.

Also known as crowd-based capitalism, companies active in the sharing economy take many different forms, but all take advantage of similar crowd-based networks and mobile/online technology to operate. They exist in a unique sphere of the market economy that sits somewhere between personal and professional, work and leisure, employee and entrepreneur. While this ambiguity largely benefits the users of sharing platforms (both suppliers and customers) it has drawn the ire of tax authorities and traditional transportation and lodging companies in many countries.

Sharing economy enterprises often come under fire for a lack of responsibility. Uber’s policy to not count their drivers as employees but rather as independent contractors is an example often cited by critics. While an employee typically requires basic employee insurance, benefits, etc. supplied by the company (depending on location, of course) independent contractors do not. Many people feel that Uber essentially enjoys the full time labor of their drivers, without taking full responsibility for their well-being.

Furthermore, with companies such as Airbnb insisting that they are simply a “communication platform,” they often absolve themselves of responsibility when users experience problems related to quality or safety. Taxi companies, hotel chains, and other companies that operate in the more traditional sphere of the service economy feel that it is unfair that sharing platforms get to participate in the industry without incurring the same costs brought about by safety regulations.

The ambiguity that is presented by many sharing platforms has caused headaches for policy makers around regulation and taxation. Some new business models presented by the sharing economy can come into conflict with existing regulatory frameworks. For example at what point should traditional bed & breakfast regulations apply to an Airbnb host? Does it depend on the number of days the guest stays? The amount of revenue generated? The services provided? Furthermore, politicians in the U.S. and Canada have accused sharing platforms of giving entrepreneurs an unfair advantage over traditional service providers.

China’s Sharing Economy

While the original concept and pioneers of the industry originated in the U.S. and Europe, the sharing economy has yet to become fully accepted by both consumers and authorities in the western world. Meanwhile, China is emerging as a leader in the sharing economy. In March, China’s National Information Center published a comprehensive report on the current condition and future development of the Chinese sharing economy. This is significant for two reasons.

First there is the sheer size and success of the sharing economy China. As of 2015, the sharing economy in China is valued at US $299 billion (RMB 1.956 trillion) and is expected to grow 40 percent over the next five years, eventually making up 10 percent of China’s total GDP. Several of the biggest sharing economy success stories have come out of mainland China, such as Didi Kuaidi, which has been valued at U.S. $7 billion in 2015. The report further indicated that in the near future, 5-10 new large scale sharing economy companies on par with Didi Kuaidi or even Alibaba will be developed in China.

Secondly, the report is significant because it is a symbol of the Chinese central government’s willingness to embrace the sharing economy and actively play a role in its development. While western governments have seen the development of the sharing economy as a challenge to be controlled, it would appear that Chinese authorities view the sharing economy as a tool for economic development.

This report shows initiative on the part of the authorities to get out ahead of the economy’s development in terms of policy. Reports have suggested that China could be one of the first countries to establish consistent and appropriate tax codes for the sharing economy, as well as create legislation for tracking and punishing abuses related to consumer safety and fraud, such as the 2015 report by the Ministry of Transport regarding ride sharing services. Large companies also stand to play a role in developing the Chinese sharing economy, with Tencent, Lenovo, and LinkedIn all recently indicating their support for the Commission on the Sharing Economy in China (CSEC).

Opportunities for Foreign Companies

Pony Ma, the founder of Chinese online leader Tencent, has recently pointed out that China’s sharing economy may be on the verge of a golden age. He very well may be right, as the Chinese sharing economy is filled with potential. China is home to 620 million cellphone users, and when surveyed, 94 percent of people said they are willing to share online – the highest rate among all countries surveyed. The Chinese economy still has many new consumers entering the middle class for the first time who do not have to readjust from a traditional ownership-based consumption model. This represents a very fertile environment for the growth of the sharing economy.

As the Chinese sharing economy matures and receives continued government support to develop, it is very possible that we will see more and more resources becoming “sharable.” Once you start looking for it, excess supply is everywhere. Recently Lenovo has expressed interest in creating a sharing platform that would utilize the company’s facilities and distribution channels to help start-ups in their product development. Baidu CEO Robin Li also has spoken about sharing the firm’s AI technology and big data capabilities with other firms to fuel tech development.

New technology and applications are a constant threat to disrupt the sharing economy, and the regulatory landscape can change rapidly. As such, foreign firms need to be keenly aware of the development of the sharing economy, and consider how they can use the various sharing platforms to their advantage.

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Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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