Wang Xing’s Revenge

The Chinese internet landscape is populated with entrepreneurs who have a gladiator mindset: it's win at all costs, even when you're on top. The War of a Thousand Groupons crystallized the Chinese phenomenon of declaring all-out war when you've achieved success.

Soon after Groupon's launch in 2008, it became the darling of the American startup world. The premise was simple: offer coupons that worked only if a sufficient number of buyers used them. The buyers got a discount and the sellers got guaranteed bulk sales. It was a hit in post-financial-crisis America, and Groupon’s valuation skyrocketed to over $1 billion in just 16 months, the fastest pace in history.

The concept seemed tailor-made for China, where shoppers obsess over discounts and bargaining is an art form.

Entrepreneurs in China looking for the next promising market quickly piled into group buying, starting local platforms based on Groupon’s “Deal of the Day” model. Major internet portals launched their own group-buying divisions, and dozens of new startups entered the fray. Yet what began as dozens soon ballooned into hundreds and then thousands of copycat competitors. By the time of Groupon’s initial public offering in 2011—the largest IPO since Google’s in 2004—China was home to over five thousand different group-buying companies.

To outsiders this looked like a joke. It was a caricature of an internet ecosystem that was shameless in its copying and devoid of any original ideas. And vast swaths of those five thousand copycats were laughable, the product of ambitious but clueless entrepreneurs with no prospects for surviving the ensuing bloodletting.

But at the bottom of that dog pile, at the center of this royal rumble, was the entrepreneur Wang Xing. In the previous seven years, he had copied three American technology products, built two companies, and sharpened the skills needed to survive in the coliseum. Wang had turned from a geeky engineer who cloned American websites into a serial entrepreneur with a keen sense for technology products, business models, and gladiatorial competition.

He put all those skills to work during what was known as the War of a Thousand Groupons. He founded Meituan (“Beautiful Group”) in early 2010 and brought on battle-hardened veterans of his previous Facebook and Twitter clones to lead the charge. He didn’t repeat the pixel-for-pixel copying of his Facebook and Twitter sites. Instead, he built a user experience that better matched Chinese users’ preference for densely packed interfaces.

When Meituan launched, the battle was just heating up, with competitors blowing through hundreds of millions of dollars in offline advertising. The going logic went that in order to stand out from the herd, a company had to raise lots of money and spend it to win over customers through advertising and subsidies. That high market share could then be used to raise more money and repeat the cycle. With overeager investors funding thousands of near-identical companies, Chinese urbanites took advantage of the absurd discounts on such things as restaurant meals to eat out in droves. It was as if China’s venture-capital community were treating the entire country to dinner.

But Wang was aware of the dangers of burning cash. That’s how he’d lost Xiaonei, his Facebook copy. He foresaw the danger of trying to buy long-term customer loyalty with short-term bargains. If you only competed on subsidies, customers would endlessly jump from platform to platform in search of the best deal. Want figured he'd let the competitors spend the money on subsidizing meals and educating the market, and then he'd reap the harvest that they sowed. So Wang focused on keeping costs down while iterating his product. Meituan eschewed all offline advertising. Instead, he poured pouring resources into tweaking products, bringing down the cost of user acquisition and retention, and optimizing a complex back end. That back end included processing payments coming in from millions of customers and going out to tens of thousands of sellers. It was a daunting engineering challenge for which Wang’s decade of hands-on experience had prepared him.

One of Meituan’s core differentiations from the competition was its relationship with sellers. This was a crucial piece of the equation often overlooked by startups obsessed with market share. Meituan pioneered an automated payment mechanism that got money into the hands of businesses quicker. This proved to be a welcome change at a time when group-buying startups were dying by the day, sticking restaurants with unpaid bills. Stability inspired loyalty, and Meituan leveraged it to build out larger networks of exclusive partnerships.

Groupon officially entered the Chinese market in early 2011 by forging a joint venture with Tencent. The marriage brought together the top international group-buying company with a homegrown giant that had both local expertise and a massive social media footprint.

But the Groupon-Tencent partnership floundered from the beginning. Tencent had not yet figured out how to partner effectively with e-commerce companies. The joint venture blindly applied Groupon’s standard playbook for international expansion: hire dozens of management consultants and use the temp agency Manpower to build out massive, low-level sales teams. Manpower headhunters made a fortune on fees, and Groupon’s customer acquisition costs dwarfed those of local competitors. The foreign juggernaut was bleeding money too quickly and optimizing its product too slowly. It faded to irrelevance while the bloodletting among Chinese startups continued.

This shows the high stakes among Chinese competitors, who sometimes neglected long-term goals when pursuing short-term gains. Wang Xing learned that the long view could pay off.

Posted by Dr. Kai-Fu Lee on Oct 04, 2018 in All Posts China Innovations AI & China

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