A wave of consolidation is sweeping China’s internet industry, and billion-dollar companies are merging with rivals they once fought against bitterly. There’s one underlying reason behind the pairings, investors say: burning money for undifferentiated businesses simply can’t last forever. And there’s a lesson here for certain Silicon Valley startups.
Bloomberg has a great rundown of this year’s China deals, noting that taxi-hailing apps Kuaidi and Didi merged to form Uber rival Didi Kuaidi, Craigslist-esque 58.com and Ganji merged to form China’s largest classifieds site, Dianping and Meituan merged to form a single group buying service, and CTrip and Qunar merged to form China’s largest travel booking site. Domestic mergers and acquisitions this year among China’s internet companies have collectively been valued at $56.9 billion, about double from 2014.
Each of these newly-merged entities were made up of competitors who offered undifferentiated services with no clear advantage over one another. While Baidu, Alibaba, and Tencent are the country’s clear leaders in search, e-commerce, and messaging, other industries in China like free video streaming, music streaming, and travel remain full of several analogous players. These players are even often backed by one of those three giants, who invest heavily in internet startups in China.
Publicly-listed US internet companies tend to step on each others toes less frequently than their Chinese counterparts. There is only one Youtube in the US, but several in China; one Craigslist in the US, but several in China. But one niche of startups in both Silicon Valley and China are ripe for consolidation—so-called “on-demand” startups, or companies that deliver goods and services within hours to customers, at the press of a button.
From California to New York City, startups like Postmates and Instacart have raised hundreds of millions of dollars to deliver goods and services to your door (often goods that are only used in one sitting, like meals or massages). But few of these companies are differentiated, and all of them are costly to operate. Many Silicon Valley investors have already expressed skepticism about these business’ sustainability, due to their reliance on cash subsidies, low-barriers to entry, and lack of brand loyalty among customers.
“A lot of investors think that on-demand is too hot, and that’s precisely why we’ll start to see mergers,” Hans Tung, managing partner of venture capital firm GGV Capital, which invests in China and the US, told Quartz.
Already US on-demand house cleaning booking company Homejoy has shuttered its doors, after merger talks with analogous competitors failed. If China’s big three, Alibaba, Baidu, and Tencent, are losing interest in hemorrhaging cash on expensive and undifferentiated companies, smaller US investors will likely follow suit.