Sharing Economy in China: Discovering Problems and Bottlenecks of The Sector

Brief Summary

“In the last century, owning things was the marker of the middle class.” This sentence from Bernard Marr illustrates that people used to assess other people’s social class based on the number of things they owned, the more wealth a person owns, the higher class he belongs to. With the industrial revolution and technology advancement, the cost of manufacturing decreased enormously today, this standard was eliminated and the trend of owning less things becomes popular among millennials with the appearance of “minimalist” movement, digitalization, and sharing economies. In this paper, the emphasis will be shared economy in China, with an introduction of the sharing economy at first, followed by a precise point of view in China, discovering problems and bottlenecks of the sector with Chinese examples; finally, based on the issues identified, recommendations will be given at the end of the paper.

Introduction

The term of sharing economy first came out in 1978 when Marcus Felson and Joe L. Spaeth introduced the concept of sharing your idle resources(time, goods) with people in need, with additional value-added while getting material or non-material returns.

After years of development, the sharing economy that people understand today has risen to a socio-economic ecosystem that focused on the sharing of human, physical and intellectual resources. It involves the shared process of creating, producing, distributing, trading, and consuming goods and services by different people and organizations. And we can find that the main characteristics of the shared economic model have the following three points:

• Firstly, using the internet to build an information platform. Breaking the information asymmetry between supply and demand, connecting both parties in a timely and efficient manner, improving the possibility of closing a deal, and reducing the searching cost.
• Secondly, viewing the temporary transfer of the right to use idle resources as the essence. It advocates the separation of ownership and right to use.
• Thirdly, attaching importance to the repeated trading and efficient use of goods. The repetitive use of resources can reconfigure, integrate and optimize the idle resources throughout the various transactions. It is essential to maximize the utility and achieve the promotion of individual welfare and the green and sustainable development of society as a whole.

The most representative examples could be Airbnb for accommodation, Uber, and BlaBla Car for transportation.

Sharing Economy in China

In recent years, with the popularity of shared economy, the domestic shared economy has shown unprecedented prosperity, from bicycles to cars, from portable batteries to umbrellas; the tentacles of the shared economy reach almost all sorts of scenarios. At the same time, under the crazy influx of capital, the growth of the sharing economy is almost madness.

As we can see the top 3 domains of shared economy in China are transportation, life services, and production capacity in 2016 and it remains the same until now. The size of China's shared economic transactions in 2018 was 2.942 trillion yuan, with an increase of 41.6% over the previous year and involving more than 760 million people, and it will continue to grow at an annual rate of over 30 percent according to State Information Center.

To find the boost force of this trend, it is necessary to go back to 2016, when shared bicycles began the trend. People can find the nearest bicycle via an app and rent it by scanning the code and they can park it anywhere on the street, to facilitate the next user. 2 particular leading companies in this domain are Mobike and Ofo. Another mostly used platform is called Didi Chuxing, it works as same as Uber and it took over Uber’s business in China in 2016 with an exchange of 18% of the company’s share in return, since then Didi Chuxing almost dominated the Chinese market.

Real VS Fake

The real sharing economy should be based on the sharing of people's existing idle goods, that is, to reduce the cost and expenditure of the whole society and individuals by maximizing the utilization efficiency of the idle resources. Such a sharing economy provides additional income to resource owners and reduces user spending, with a little negative impact on other third parties, in economic terms called 'Pareto Improvement.” However, concerning the current shared economy model, we rarely see an increase in utilization efficiency of existing idle goods, because the concept is being defined differently. In China, “Sharing” means any short-term rental of resources activated by a smartphone. April Rinne, an adviser who is a member of China’s National Sharing Economy Commission, he says that he was thrilled that China frame the shared economy as “national priority,' but after he finds it meaningless as the shared economy is so broadly defined and transactional, as China even thinks of Amazon as part of the sharing economy.

We have to understand the difference between “sharing” and “creating” idle goods or services. Taking the example of shared bicycles, companies focused entirely on 'increments' rather than “stock”, they developed based on the mass manufacture of new bicycles by various vendors; also, instead of really “sharing”, companies are competing with each other for market penetration.

Mobike and Ofo, both had approximately 150,000 bikes in Beijing in early 2017, raised to 2 million by the end of the year, according to public reports. Across the country, the total number of shared bicycles in major cities is as many as tens of millions. As a direct result, failing to make full use of the resources caused a great waste as sharing bicycles in the urban streets overrun and occupied public space.

Bottlenecks

1. First, the asset model constrains the development of the industry.

At present, most of the domestic sharing economy is capital-oriented, both bike-sharing and car-sharing. In order to quickly seize the market share and customers, companies are burning money on a large scale, with extremely high costs. Once they have financing difficulties, the capital chain will inevitably suffer a break, the sharing platform will not be able to support all kinds of high expenditures. Ofo and Mobike, have raised $2.2 billion of capital and are valued at more than $4 billion in 2017, they are burning money to compete with others.

The same strategy was used by Didi Chuxing when they were competing with Uber, both parties were burning cash to invest, having a pricing war to gain more market shares Uber lost $2 billion, and Didi even spent more, they raised billions to replace Uber. As Didi received funds from Alibaba and Tencent, Uber abandoned its expansion in China to avoid more losses. Oscar Ramos, Program Director at Chinaccelerator, indicates that, “A lot of cash kills startups, when you have too much money, you solve the problems with money, not creativity”. This is the real picture of Chinese firms, lack of creativity and are full of cash, they just simply buy everything and make money instead of investing in innovations and intellectual property.

2. Secondly, the lack of supervision questions human nature and the hidden danger of safety.

On the one hand, the existing model of shared economy tests humanity to a certain extent, which can be explained by the theory of 'Tragedy of the commons' in economics. Because of the unclear property rights and lack of strong regulation, every user is more inclined to over-utilize the public resources with no worry about any punishment in the excessive use of public resources, resulting in the depletion of resources, and everyone will end up without benefit.

The currently shared bikes are a classic modern version of the Tragedy of the Commons, where the cost of making mistakes per user is extremely low due to a lack of regulation so that the number of damaged bikes can be found everywhere. Another example could be an umbrella-sharing enterprise, which was praised by The People’s Daily as “a show of human care, releasing the warmth of the city.” A few weeks after, the nearly 300,000 umbrellas stocks distributed by a new company called Sharing E Umbrella had been either lost or stolen. On the other hand, the platform supervision is not well established so tragedies occur frequently. Taking the online car-hailing platform Didi as an example, it tends to recruit as many drivers as possible for profit maximization but ignored the strict examination of the driver's personal background and quality. As a result, criminal risk (sexual harassment, rape, robbery, and murder) increased, once problems arise, customers will inevitably lose large areas or use less frequently, which is extremely disadvantageous to the survival and profitability of shared economic platforms.

Conclusion

From either the view of green and sustainable development ideals, or from the demand of business model innovation and resolution of overcapacity, sharing economy is the trend of the future, and it is unstoppable, as China’s State Information Center estimated that by 2020, the sector of the sharing economy could account for 10% of the GDP growth. Although the current industry development faces problems and difficulties, but from another point of view, pressure = motivation. Perhaps it is an excellent time for the adjustment and optimization of the shared economic sector.

Recommendations

1. It is necessary for platforms to change their business operations. By digging into the essence of sharing and doing market research or big data analysis, identifying the real need of users and how to share products to help people's lives, and to create new forms of business through constant innovation.
2. At the same time, we should make efforts to establish a sustainable and stable profit model to reverse the extremely high dependency on high capital investment.
3. Firms need to strengthen their corporate social responsibility. In addition to profit, they should also pay attention to the contribution to society, consumers, and the environment in the course of operation.
4. Relevant departments must increase supervision forces and regulations in a timely manner to keep pace with the savage growth of the sharing economy and should put forward stricter monitoring standards and more severe punishment measures for the shared economy industry.
5. Last but not least, great efforts should be made to break monopolies, prevent capital kidnapping, and create a fair, transparent and legal business environment that is crucial to the sustainable and healthy development of the sharing economy.

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