Why China group buying doesn’t work (even though it could)

The following article on China’s group buying site is a guest contribution that is republished (from here) with full permission from our friends over at TechOrange.

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Why China group buying doesn’t work (even though it could)

A lot of articles touting the sad state of China’s group buying market have cropped up recently and I am a little surprised. The surprise is not so much that the Chinese market is hurting – any industry with 5,000 competitors built upon a young and shaky business model is likely to hurt – but rather that an idea that was seemingly made for the country does not quite work. The Chinese love a deal and have people aplenty. For all intents and purposes the group buying industry should be healthy. Unfortunately, it’s not.

The stories of fraudulent companies selling bogus deals are common. China’s Ministry of Commerce estimates that 40% of the complaints regarding online shopping are related to group buying alone. Cities have seen group buying-related complaints increase 10-fold from last year. Small wonder things are not going so well. In an industry model that supposedly favors the consumer, China’s consumers are getting sheared.

My surprise is multiplied when I look back at the group buying market in Taiwan, the island perch from where TechOrange writes, and see a much rosier picture. Last month, the industry reported 15% month-on-month revenue growth, following consecutive months of similar growth. To be sure, there is no guarantee that growing revenue means growing profitability, but in our months of covering Taiwan’s group buying market (July June May April), the whole tone seems to be pretty different from that in China. Complaints are few and generally, the tuan-gou phenomenon is well-received.

One need only look at industry grand-daddy Groupon to get a pretty good barometer reading of the contrast. In China, the company is struggling to make a profit and, in the land of the iron rice bowl, is actually laying off employees.

Meanwhile, in Taiwan it presciently acquired Atlas Post to gain the number one position, a move that is paying off as the market grows aggressively. In fact, though revenues are growing, Groupon’s share of the market is actually shrinking. It’s doing a solid job, signing up popular brands and inking creative deals, so for it to do well and still lose ground is unfortunate for the company but indicates a certain vibrancy to the overall market.

Competitors are chipping away and new companies are entering – most recently Yahoo Discounts and Renren’s Nuomi have joined the fray – but not to the point of overcrowding seen in China.

Ultimately, that’s probably the key difference between the two markets.

In China, the problem is not so much that the market is not growing (I am sure that it is), but that no one company has emerged as leader. This encourages many more entrepreneurs to think maybe I can be #1, leading to hordes of companies with very small pieces of a very large pie. The opposite is true in Taiwan: it’s a smaller market with a clear leader, which helps to establish a sense of order in the realm. More order means more credibility and fewer bogus deals, problems that cripple the industry in China, where the charlatans and cheats must be weeded out in order to restore confidence in the model.

In the grand scheme, Taiwan’s 23 million represent a single market in China, but the island serves as an excellent control group to demonstrate that group-buying is viable in China, but a renewed focus on quality is needed. The Chinese are calling for a credible group-buying experience, is the industry listening?

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Tech Orange is a blog that covers tech and startups in Asia: find more at the website, Facebook page and Twitter account.

Image via Want China Times

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