Going East: Will The Chinese Market Be A Bumpy Ride For WeWork ?

摘要: WeWork’s predecessors in China tend to operate like incubators in their later developmental phase. Faced with the challenges presented by the unique market landscape in China, will WeWork triumph in the Chinese market? Or will it be a bumpy ride for this New York based co-working space pioneer like what has happened to most international companies in China?

(Chinese Version)

The pioneer and only unicorn company in the field of co-working space, WeWork, has launched its first space in Shanghai, China, on July 1st. After amassing a new round of financing at USD 450 million, WeWork’s valuation subsequently surpassed USD 16 billion, almost as large as the total amount of all the valuations of the co-working space companies in China combined.

As a matter of fact, pushed by the wave of mass innovation and entrepreneurship, the co-working space industry has been developing rapidly in China. At present, there are over 2,300 co-working spaces, 2,500 tech incubators and accelerators, 11 national independent innovation zones, and 146 national high-tech zones in the country. The supply has literately surpassed the demand in this particular sector. Emerging brands such as UR Work and FTOWN etc. are following WeWork’s footsteps, considering WeWork as the industry role model.

However, prosperous as the market seems to be, so far there hasn't been any Chinese co-working brand that can compete with WeWork. Even UR Work, the company that claimed they could achieve WeWork’s success, which was to sell out 18,000 desks to professional talents, in one year, only has a valuation of ¥ 4.5 billion. Apparently, this number only accounts for a small proportion of WeWork’s valuation.

So here comes the question: What makes WeWork so special? Can WeWork triumph in the Chinese market and achieve what it has had in the U.S.? Or will the Chinese market be a bumpy ride for WeWork like what many international tech companies have encountered in this country?

Why Chinese WeWorks all became incubators eventually?

Although in the beginning all the co-working startups in China intended to become the Chinese WeWork even though their target audience, operation strategies, and business models etc. differ greatly from WeWork.

The only common similarity is that these companies also sell their co-working space in certain packages. WeWork is valued in accordance with the standards for tech companies like Facebook and Snapchat for the fact that it has created a new market (micro-office space) and a new market concept (space as a service). These groundbreaking achievements allowed WeWork to enter the circle of shared economy alongside with Uber and Airbnb. Without a doubt, WeWork is a star company that enjoys a blue-ocean market.

In China, co-working space startups all became makerspace. Up till now, the co-working space startups, which later ran off the track, are competing with incubators, accelerators, and startup parks for quality startup companies, lands and supporting policies from local governments. It’s apparent that these companies are facing a red ocean as the supply surpasses the demand.

What made these Chinese WeWorks go off their original track? In fact, such phenomenon is mainly caused by difference between the U.S. and China’s market demand. WeWork was founded in 2010, at which point there were already 20 million one-man companies. What’s more, this number had been increasing by 14% annually due to the economic crisis and high unemployment rate.

In 2014, WeWork received a financing of USD 355 million, in which year the number of freelancers and independent workers in the U.S. had surged to 42 million. These self-employed people, freelancers, and entrepreneurs are exactly the clients WeWork has been looking for. With WeWork’s platform, they can get into a co-working space and find a desk to sit down and start to work immediately. It’s as simple as hailing a cab via Uber. WeWork provides its users with a comfortable working space, environment and working facilities, which users can enjoy even if they are traveling.

The freelancer community is still small and growing in China

The freelancer community is still small and growing in China

Uber provides its users with cab-hailing service that matches them with available cars anytime anywhere, bringing up a tech revolution in the commuting sector. What WeWork does is quite similar. WeWork launches tens of working spaces across the country and makes them available to whoever needs a place to work in, which has evolved into a revolution of offices.

However, unlike the shared economy model Uber has created, WeWork’s co-working space model won’t take off so easily in China since the freelancer and independent worker communities is rather small when compared with that of the U.S., which accounts for over one third of the work force.

According to the 2015 Chinese Freelancer Report from LinkedIn, freelancers in China are mostly active in small and mid-sized cities. The top five cities that have the most freelancers, Beijing, Shanghai, Guangzhou, Shenzhen and Chengdu, only account for 26% of total number. More importantly, China has a rather complicated household registration system and chaotic rental market, which makes it harder for professional talents to become freelancers and work freely. Additionally, the “guanxi” culture (a cultural phenomenon in China which means using connection to achieve certain goal) is also a major contributor. Currently freelancers on LinkedIn have 2.5 times more connections than the average on the platform. In this case, Chinese freelancers don't have a rigid demand for office spaces.

WeWork is more expensive than its peers

WeWork is more expensive than its peers

The rise of the Internet industry and the bubbles it generates contribute mostly to the emergence of freelancers and one-man companies in China. However, people favor to become entrepreneurs instead of freelancers, and therefore they are more sensitive to the cost of office space, which means they won’t really pay a fee two or three times higher the average for a co-working space and free beer (according to CompStak’s report, WeWork is two to three times more expensive than neighboring office spaces). As for successful entrepreneurs (Taobao businesses for example), they can easily transfer from their home to different industry parks (e-commerce zones) and incubators. This explains the reason why Chinese WeWorks all turned into incubators in the end.

How can WeWork fit in the Chinese market?

If co-working space startup becomes an incubator, the entrepreneur of the project would find himself in the battle of competing for startups while they don't really have an advantage with office space. The Development Report On Chinese Makerspace Industry issued by UR Work in April states: Some regions make the building of Makerspace an indicator or launch makerspaces that have less functions and with overlapped growth through supporting policies. For instance, one province has voiced that it’s going to nurture over 1000 entrepreneurial service platform such as makerspace by 2020.

As the number of makerspaces becomes an indicator of government performance, the rent of office space is lowered and even free for entrepreneurs to use. “In the Internet industry, the office rent is not the highest cost among all,” an industry insider revealed. “In fact, the cost of personnel is higher.” Profiting through providing office environment like what WeWork is doing can’t really happen in China. That’s why many makerspaces in the country have a rather disappointing letting rate.

The SOHO2 3Q at the Guanghua Road only has a letting rate of one third, which forces Pan Shiyi to attract clients with outsourcing agency. However, the 15% commission rate is not a small cost. In March this year, media reveals that UR Work’s Sunshine 100 has rented out less than 50% of its work desks. And of course, once UR Work cooperates with industrial parks like Xiamen Software Park, the letting rate will increase to 55%. In reality, the project which WeWork cooperates with Shanghai Harbor Economic Area on, now has a letting rate over 80%.

In this case, the business model of Chinese makerspaces becomes incubator platforms that boast financing and entrepreneurship opportunities and resources, which makes them compete directly with actual incubators. Real estate masterminds like Pan Shiyi and Mao Daqing entered the incubator sector from the downstream and therefore encountered more difficulties compared with Internet companies such as Tencent and TouTiao, and investment organizations like Innovation Works.

Furthermore, they also need to catch up with these companies in areas such as the selection of startup companies and the building of entrepreneurship service ecosystem. However, VC organizations that are behind UR Work, such as SEQUIOA Capital, Zhen Fund, Gaorong Capital, and Innovation Works etc., only use UR Work as a probe to test the waters, serving as one of the services made available to entrepreneurs.

The different target audiences and positioning also cause the difference in choosing the location for Chinese makerspaces and WeWork. UR Work mainly installs its spaces in industrial parks and office towers away from the city center. For instance, over half of UR Work’s spaces in Beijing are located outside the fifth ring. In contrast to that, WeWork generally chooses high-end office towers in the CBD as its base to set up spaces.

WeWork’s first space is at the core of the business center at Puxi area, Shanghai, within the Jingan We Innovation Park. However, WeWork is also trying to do its business the Chinese way. Ten days before the opening, WeWork reached an agreement with Tech Temple and leased most of its open desks to this Beijing-based incubator, helping them to penetrate the market in Shanghai.

An industry insider revealed to TMTpost: “China’s co-working space can barely sell out their desks since Chinese people generally have a higher demand of privacy. It’s true that people can communicate better in an open space, but they don’t feel comfortable being in the work mode in an open environment.”

An insider who had just paid a visit to WeWork’s space in Shanghai revealed that the operators claimed that their clients weren’t startup companies but American businessmen working in China. WeWork has entrusted incubators to run its open desks and focuses on its target audience and sell its offices to them. Perhaps this is WeWork’s operation strategy in China.

WeLive’s model, which has been considered as the new stimulus of growth by WeWork, has also become common in China. Different kinds of service apartments have entered the chaotic apartment rental market, bringing fresh blood to the industry and offering more options to the consumers. It’s should be noted that model that combines WeWork and WeLive has had some examples in China.

For instance, Xiaomi’s You+ apartment and V-Zone’s Makerspace Community are the perfect examples of it. As a matter of fact, pushed by supporting policies from the government, companies that involve entrepreneurship can get quality projects more easily and have more support from the local government.

According to V-Zone’s Zhou Junqiang, who aims to build an all-round community, the cost of land has surged by several times compared with last year due to the sudden rise of many other similar projects. The making of makerspace communities also involves connecting life service providers and incubators, which is not something that a foreigner like WeWork can get a hand on in a short time.

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[The article is published and edited with authorization from the author @Zhang Yuan, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.

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