When Uber retreated from China this summer, it seemed like a bellwether for U.S. companies trying to push their way into the country. The world’s most valuable venture-backed startup lost at least $2 billion in the world’s most populous nation in two years, according to people familiar with the matter, trying to build market share with free rides. In the end it sold its China operations to local leader Didi Chuxing. Now, America’s second-most-valuable startup is betting it can do better.
Where Uber rushed in, Airbnb has taken its time building relationships with China’s industry leaders and government officials. A 2014 partnership with Alibaba made it easy for Chinese users to pay for Airbnb rentals with Alipay, the local equivalent of PayPal. A partnership deal with Tencent, finalized in February, got Airbnb built into WeChat, China’s dominant messaging app. This year, Airbnb has teamed up with the governments of four major Chinese cities, including Shanghai and tech hub Shenzhen, for ambiguous tourism promotions that, among other things, mean the service is welcome in those hot spots.
And on Wednesday, Airbnb began storing data relevant to its China operations on servers in-country, meaning officials can access them, an early move to comply with a national law due to take effect next summer. “Our strategy is to work closely with regulators and build through on-the-ground partners,” says Airbnb Chief Financial Officer Laurence Tosi, who’s spending most of his time leading the company’s nascent China subsidiary. Airbnb says it’s just trying to work within the letter of the coming law and notes that data not pertaining to Chinese bookings will remain off-limits to the government.
Tosi, who quietly signed on last year from private equity firm Blackstone, says Airbnb China, a separate entity that has about 30 employees and 75,000 listings in China, plans to increase its staff to 300 in two years. He says the company will focus expansion efforts on recruiting and marketing, though he wouldn’t say how much has been allocated for either.
Airbnb is also bidding more directly for market share. The company is in talks to purchase local rival Xiaozhu, a four-year-old startup with about 100,000 listings. This would give Airbnb a better shot against China’s ostensible market leader, Tujia, which lists more than 450,000 homes and is adding more from recent acquisitions. Tujia has raised at least $458 million in funding in its five years, including from Chinese travel giant Ctrip and Expedia subsidiary HomeAway.
“It will be very hard for Airbnb to expand in China alone via organic growth,” says Marie Sun, an analyst at Morningstar Investment Service. Still, she says, the country’s home-sharing market “is at a very early stage.”
Listings totals don’t provide the whole picture. At any given moment, about 1 percent of Tujia’s listings are occupied, according to internal documents reviewed by Bloomberg. That may help explain why the quarter ending in June, the best three-month performance Tujia has reported, produced less than $2 million in revenue, according to the documents. Tujia President Zhuang Hai says revenue numbers are misleading and that volume is most important. Its volume, the value of transactions through the site, was $22 million during that same quarter, the documents said. “Whoever controls the traffic and has the most transactions will win the upper hand,” he says.
While Airbnb declined to provide its occupancy rates, people close to the company say it floats between 8 percent and 12 percent in China, compared with an average city-by-city rate of 12 percent to 18 percent in the States. Zhuang says Tujia’s advantage lies partly in its wider range of services, such as helping property owners clean and manage their rentals. But he acknowledges that Airbnb is a strong competitor in several of China’s major cities, including Beijing.
Airbnb’s compliance with Chinese data laws is less of an issue for its business than the local audience’s unfamiliarity with home sharing, says Arun Sundararajan, a business professor at New York University who specializes in research on digital marketplaces. “The trust necessary to hand over an apartment to a stranger—the bar is higher in China,” he says.
One of Airbnb’s investors says the company is more worried about its relationship with Baidu, China’s leading search engine. The two companies are negotiating a deal similar to those Airbnb struck with Alibaba and Tencent, says the investor, who asked not to be identified because the discussions are private. Reaching an agreement has been challenging due to the tangled web of alliances in China: Baidu holds a sizable stake in Ctrip, a major backer of Tujia. Ctrip and Tujia said in October that they were merging their home-rental businesses.
Tosi says another priority is finding Airbnb China a chief executive officer. Airbnb said last year that investors Sequoia China and China Broadband Capital would help identify one, but the search continues. “As with all things related to our China plan,” he says, “we are moving extremely slowly, carefully, and deliberately.”