Didi Chuxing, the ride-hailing startup from Beijing that first hit global headlines in 2016 for defeating Uber in China, made the news again recently – but not for ride hailing. Its autonomous driving spinoff, Didi Woya, raised $500m in May, the single largest investment in the local sector to date. Several days later, Didi Chuxing announced its foray into the on-demand freight services market.
From its core business, Didi Chuxing has, in the span of just four years, extended its presence into other sectors – bike and car sharing, errand service, car rentals, and more – through acquisitions, investments and partnerships, plus building its own companies from scratch. When all the dots are connected, it becomes clear that Didi Chuxing is building a mobility empire. But it’s not the only Chinese startup creating an ecosystem.
Bytedance, the owner of TikTok, which scored its first success with news aggregator, Jinri Toutiao (literally, “today’s headlines” in Chinese), runs a content-based ecosystem these days with a string of its own apps, including TikTok’s Chinese version, Douyin, and those it acquired from other content providers, such as the online encyclopedia, Baike.
Such a trajectory is a regular feature of China’s tech economy by now. The first generation of tech giants – Baidu, Alibaba and Tencent, collectively known as BAT – have each created its own ecosystem based out of search engine services, e-commerce and social networking, respectively.
From verticals to ecosystems
In 2014, when Alibaba filed for the world’s largest ever IPO in the US, the Chinese e-retail giant used the word “ecosystem” no fewer than 160 times in its prospectus. But even before that, the concept of ecosystem had been an important part of Alibaba’s growth strategy.
According to Ming Zeng, former CSO at Alibaba and current Chairman of the Academic Council of Alibaba, the company’s management team jointly came up with the company’s vision: to “foster the development of an open, coordinated, prosperous e-commerce ecosystem.
“That’s when Alibaba’s journey really began,” he said.
The internet giant started in 1999 with an online marketplace to connect buyers and sellers of goods. As the business grew, Alibaba began to expand into related areas, e.g., digital payments via Alipay, and logistics and parcel tracking through Cainiao. In 2019, about 711m users placed orders via Alibaba’s e-marketplaces, including Taobao and Tmall, and more than 1.2bn shoppers used Alipay.
Alibaba’s huge user database also helped it expand into new areas. A recent example is Alibaba’s online aid crowdfunding platform, Xiang Hu Bao, which was launched within the Alipay app in 2018. Alipay’s massive user database, coupled with the well-known Alibaba brand name, enabled Xiang Hu Bao to attract new users. Xiang Hu Bao quickly become a market leader with over 100m users, even though a number of startups had created the same product way earlier, having spotted the business opportunity as far back as in 2011.
The data generated from Alibaba’s e-commerce business also made it easier for the group to expand into other verticals. For example, its digital marketing platform, Alimama, uses sales data from the e-marketplaces within the Alibaba Group to provide targeted advertising to merchants; while its travel services platform Fliggy makes personalized recommendations based on the user’s profile and data collected across the Alibaba platforms that he or she uses.
Didi Chuxing has also amassed data about driving and shared mobility from its ride-hailing business, collected over a range of sources, from the Didi app in driver’s phones showing patterns in acceleration or swerving, to customer feedback and booking sequences.
The company’s DiDi Labs in their Mountain View and Los Angeles offices applies AI and machine learning to over 108TB of data collected from processing more than 40bn route planning and 15bn location requests each day, to “predict and meet riders’ needs, while developing algorithms for our self-driving projects.” The same data also goes into creating personalized services like insurance plans and financing products to Didi drivers.
“Such mountains of data have also paved a solid foundation to train machine-learning algorithms for autonomous driving," said Didi Chuxing’s VP, Liu Haijiang.
Competing with super apps
China’s mobile internet market grew to over 1.156bn users in March this year, the world’s biggest market by user number. It’s also a market that is unlikely to grow much further. Internet giants hence need to retain their existing users and not lose market share, and grow by enticing new users from rivals – by offering the most attractive super apps.
Alibaba’s Alipay, Tencent’s WeChat and Meituan, China’s biggest on-demand food delivery app, are all super apps that have their own ecosystems of services within, providing users a one-stop shop. Alipay, for example, lets users shop, pay for their online and offline purchases, order food and rides, book medical appointments and donate to their favorite charities.
Nearly all the other internet giants in China are building their own super app. Using mini programs, which run as apps within an app, these super apps allow new and partner businesses, e.g., a startup investee, to offer services without the user having to download separate apps for each service.
But not all tech giants have been quick to build super apps. Baidu, a first-generation tech giant and a dominant player in China’s search engine market, is a latecomer to the business, having only started to build its mobile ecosystem in 2019 by expanding into short videos and live-streaming commerce. In May 2020, Baidu relaunched the local lifestyle services on its app, about three years after it had sold its on-demand takeout delivery business to Ele.me – now an Alibaba company.
There are also signs that Didi Chuxing wants to become the next super app. After launching bike-sharing, car rental and errand services, Didi Chuxing recently allowed users to access its pilot grocery e-commerce and robotaxi services via its app.
Unicorns by giants
According to the consulting firm Ctoutiao, over half of the unicorns in China are either founded by BAT or have received investments from BAT. More than 90% of companies valued at over $5bn are related to the three giants and their ecosystems.
The rise of Pinduoduo, China’s second largest e-retailer after Alibaba, is a good example. Just three years after it was established, the social commerce platform hit the RMB 100bn milestone in gross merchandise volume in 2017, something that took Alibaba’s Taobao five years and JD.com 10 years to achieve.
A number of factors contributed to Pinduoduo’s achievement, including its innovative model combining social networking with e-commerce, which drives user engagement and retention, as well as deep discounts for group purchasing. But Tencent’s involvement cannot be ignored. Its ubiquitous super app WeChat, with 1.1bn MAU, offered Pinduoduo a steady stream of traffic, full range of resources for user engagement, cloud service and payments solutions covering the entire shopping cycle.
Smartphone maker Xiaomi has also built an ecosystem around its Android-based operating system for smartphones (MIUI) and other devices made by companies it has a stake in. The journey started at the end of 2013, when Xiaomi launched its supply chain ecosystem program, with plans to invest in 100 hardware startups by 2018.
A number of startups have flourished under Xiaomi’s wings, taking advantage of its brand reputation and distribution channels. Four companies in the Xiaomi ecosystem, including the wearable maker Huami, achieved unicorn status by end-2015.
By 2017, Xiaomi’s ecosystem had 99 startups that generated $3.16bn in annual revenue. Hundreds of different products, including air purifiers, smart watches and e-scooters, are available in Xiaomi’s stores, nearly all of which are internet-connected devices.
Such success stories may explain why some businesses are eager to join a giant’s ecosystem. Talkweb, China’s biggest education digitalization service provider, became Huawei Cloud’s partner in 2017 to resell its cloud service.
At the time of the tie-up, Talkweb chairman Li Xinyu was bullish because of Huawei Cloud’s solid R&D capabilities and connections with enterprise and government clients. “In the future, competition will be among ecosystems, instead of companies,” said Li, “The earlier we find our place within Huawei Cloud’s ecosystem, the more opportunities will be presented to us.”
Being part of a giant’s ecosystem also has its risks. In its IPO prospectus, Pinduoduo said its biggest investor, Tencent, was a risk factor: “Tencent provides services to us in connection with various aspects of our operations. If such services become limited, restricted, curtailed or less effective or more expensive in any way or become unavailable to us for any reason, our business may be materially and adversely affected.”
Smaller companies also cannot afford the fallout resulting from being excluded from an ecosystem. For example, the share price of Chinese microlender Qudian sank to an all-time low in August 2018, because investors worried that Ant Financial, Alibaba’s financial arm, may not renew its strategic partnership with Qudian.
For startups, then, it is a tricky choice. Accepting or rejecting an invitation from a giant to join its ecosystem can lead to completely different outcomes. China’s bike-sharing market used to be dominated by Mobike and Ofo. The former accepted to become a part of Meituan’s business and is now a traffic gateway for the on-demand food delivery giant’s super app.
By contrast, in the case of Ofo, founder Dai Wei preferred to retain control over his company and turned down Didi Chuxing’s offer to buy his startup. Ofo has been struggling since: according to the latest news, there are still 15m users waiting for Ofo to refund them their deposits, of RMB 99–199 each.
But it’s been shown that startups can also survive and even thrive without the giants. The most famous example of this is Bytedance, today the world’s most valuable startup. Bytedance launched Jinri Toutiao in early 2012, when the Chinese began turning to smartphones for everything, including reading the news. Using AI-powered algorithms to recommend news to its users, the app attracted about 240m DAU at its peak.
In July 2016, ByteDance founder and CEO Zhang Yiming turned down Tencent’s offer to invest in Jinri Toutiao. In the same year, ByteDance rolled out the short video app Douyin, which quickly went viral. And the rest is history. Today ByteDance is a major player in many other sectors, including internet search, gaming, edtech and e-commerce, entering through investments or acquisitions. Douyin alone boasts of 500m MAU.
Zeng, the former Alibaba CSO, believes that the best internet companies have become some of the most highly valued companies in the world today, despite emerging only in the last 20 years, because of their capabilities in “network coordination and data intelligence,” and their stewardship of ecosystems that are “vastly more economically efficient and customer centric."
“These firms follow an approach I call ’smart business’ and I believe it represents the dominant business logic of the future,” he said.