Start-ups Can’t Survive vs. Giant Ctrip: Despite the deep pockets of venture capitalists willing to get behind them, start-up travel companies in China are finding it difficult, if not impossible, to stand up to the giant in the market—Ctrip.
According to an item last week in ChinaMoneyNetwork.com, venture capitalists have invested around $500 million in the Chinese travel sector during the past two years; this figure is from information provided by data tracker IT Juzi. In 2014, there were a total of 129 investment deals in the online travel segment, with 66 deals in the seed and angel round.
Several factors have contributed to the failure of travel startups in China, the article suggests, but no factor plays as large a role in this development as does Ctrip. Some cases follow:
—Tao.117go.com, branded as Taozailushang in Chinese, an online customized travel package platform with backing from Alibaba Group Holdings, Redpoint Ventures, Softbank Corp. and New Horizon Capital, has confirmed that it is currently going through liquidation.
—Maidou Travel, a start-up providing overseas leisure travel packages, has folded.
—Weekend get-away trip provider Where To Go On Weekends has shut down operations.
—Last-minute travel package start-up Ailvxing is no longer in business.
—Ailvxing’s one-time rival Lailaihui is cutting staff and fighting for survival.
Here’s What Happens: In the case of one of the aforementioned shutdowns, when Zhang Wenlong established Where To Go On Weekends in 2014, his plan was to zero in on weekend get-away travel products, a fragmented area with relatively low Internet penetration. Ctrip, however, had the same notion. Since last year, the company has made massive investments in one-day trips and local get-away packages. After Ctrip acquired Qunar in October 2015, it formally established a local travel business unit.
In another instance, Woqu.com, a start-up focused on high-end overseas travel packages, experienced another way to be defeated by Ctrip. After attracting two rounds of venture funding with Tencent Holding Ltd. as an investor, Woqu.com partnered with Ctrip by providing its tour packages on Ctrip’s platforms as a third-party supplier. Similarly, as Ctrip decided to expand its own overseas tour package offerings last year, it began giving its own products preferential treatment in search and guided traffic flows. Woqu.com soon realized that it wasn’t able to generate enough traffic on its own to survive.
Aside from bad timing, the article speculates, Chinese travel start-ups believe their failure may be partially attributable to a speculative mindset, or the so-called “2VC” model, meaning that founders started companies with the sole purpose of raising venture capital money, which is used to acquire users and then to raise more money, without a solid business model or innovative technology.
For example, the founders of Maidou Travel reportedly gleaned information on which public account venture capitalists followed the most on WeChat. They then bought advertising dressed as real content on these WeChat accounts to gain investor attention and eventually venture funding. While the ChinaMoneyNetwork concedes that the 2VC model is prevalent among Chinese start-ups across all sectors, the difference is that travel start-ups have awakened earlier than others to the problems of not having a sustainable business plan.
On the other hand, Ctrip has been steadily buying competitors and/or investing in smaller competitors. Last year, the online travel giant acquired a large stake in eLong, announced the Ctrip-Qunar deal, and invested in many smaller companies.
“As a result,” the article states, “Ctrip is now the absolute monopolistic force in online travel in China. One anonymous analyst jokingly describes it as holding a 100 percent market share, as the company does not disclose its market position for fear of attracting regulatory attention—although numbers gleaned from its annual report are telling evidence of its dominance. For the first quarter of 2016, Ctrip reported total revenues of $682 million, an 80 percent increase year-on-year primarily due to the Qunar deal.”
Ctrip’s scale makes it almost impossible for any start-up to compete, no matter where the battle ground lies. For instance, Ctrip would pay millions of yen to book all the rooms in a resort during weekends, in effect cutting any competitors off, says Huang Zhiwen, the founder of Where To Go On Weekends. “There are still lots of inefficiencies in travel such as hotel marketing and local tours,” he says. “But there is no chance that anyone can create another travel platform.”