The top five reasons China’s O2O startups die so fast

Jing Gao

Over the last two years, China’s Internet Plus strategy has assisted with the massive uptake of smart devices and as a consequence, O2O apps and companies have mushroomed. According to a survey by iResearch Consulting Group, which focuses on the Chinese IT industry, it is estimated that the O2O business is as large as RMB 418 million (USD 66 million).

O2O or ‘online-to-offline’ is the most heated industry in China. Its business concept is about establishing a platform, letting consumers choose products and services online and enjoy them offline. A handful of Chinese IT companies have thrived in the O2O sector: Alibaba’s Taobao, E-commerce giant, The Chinese ‘Yelp’, and China’s ‘Groupon”

However, the “great leap forward” of O2O also has a high rate of failure. In the first half of 2015, more than 300 O2O startups in 16 sectors were permanently shut down, according to Chinese magazing Economy. Why are so many Chinese startups dying at an alarming rate? has analysed a series of cases and found common factors which have contributed to their failures.

I. The industrial oligopoly

When the three Chinese tech titans Baidu, Alibaba, and Tencent, also known as “BAT”, entered into the O2O business, either by acquiring or investing in lead players, they dominated the rules of the game. The small shrimps were easily crushed by the large sharks, and the market entry barrier has been raised dangerously high for newcomers.

An obvious case is Didi Kuaidi. By the end of 2014, Alibaba-backed cab-hailing app Kuaidi and Tencent-funded counterpart Didi, had a combined market share of 99.8% in China. However Didi Kuaidi’s market share has since shrunk to 80%, because of the entry of Uber, who is now partnering with Baidu. Each one of them is simply too large to compete with. To secure their market leadership, Kuaidi and Didi merged in February 2015. Industrial website found 11 alternative cab-hailing apps which were once popular and have since died from 2014. Among them was Yaoyao (literally “Shake-shake”), which was founded in February 2012 and was the very first car-hailing app in China.

Kuaidi and Didi accounted for 99.8% of China’s cab-calling services back in 2014.

II. A homogeneous market with cutthroat competition

Blind imitation and plagiarism is a serious problem affecting Chinese tech companies including those operating in the O2O sector.

If you Baidu search “food delivery app”, dozens of apps pop up. If you look at the two largest ones, Meituan Delivery and Ele.Me, you will find their interfaces look strikingly similar. More than that, they have the same business model, and the lists of local restaurants they work with are not that different. In addition they resort to the same trick to drive user growth: giving customers ‘red envelopes’, a form of cashback reward program. Unfortunately the real difference that matters to users is probably only the cashback rate.


Side-by-side contrast of Meituan Delivery and’s user interfaces

That explains why, according to an incomplete list compiled by The Maker Commune, a WeChat account that writes about Chinese startups, at least 17 food ordering sites in eastern China went out of business since January.

III. Artificial demand.

The Chinese beauty industry was quick to jump aboard when the concept of O2O first caught on. Today, at least, 100 mobile apps offer on-demand door-to-door manicure service. Similarly, hairstylists, makeup artists and even spa services, are all now made available on demand with a tap on the screen.

Is there really such strong demand? Those who have the worst work-life balance or for some reason can’t get out of their home certainly applaud the idea, but isn’t it too much of a hassle to get the spa set up at home, or clean up the the floor after a haircut? More importantly for both the men and women who really trust and bond with their favorite beauty salons, it is actually worth the time and trouble to visit their preferred salon.

The O2O business model has penetrated into many industry sectors including health care, beauty, weddings, real estate, home improvement, tourism, automobiles, transportation, education, food and finance. When startups expect people to order home a dentist or an English tutor, they are asking people to make lifestyle changes. It will take time, and sometimes a painful lesson, to make that happen.

IV. 020 is a money-burning business

You gotta have very deep pockets or a real angel investor if you want to start an O2O site. So many startups have simply burnt themselves to the ground only to find their angels were no longer willing to foot the bill.

Achieving unrealistic growth rates, at least on the surface, is all about spending money. In addition to paying both cab drivers and passengers, Didi and Kuaidi gave away free smartphones pre-loaded with their apps. Food delivery services hire a huge number of “errand boys” to make sure they reach every corner of every major Chinese city. Vacation home rental sites knock on the doors of property owners to pay for home improvement. The Sales, PR and marketing effort needed in order to get the word out and get local businesses on board, all involve large expenses. Some startups even resort to approaching random people on the street and handing out cash to anybody who downloads and installs their apps.

Naturally, BAT-backed apps can live much longer than cash-strapped smaller players.

V. Poor quality control

Startups cannot have it both ways: the cost of rapid nationwide expansion may often be compromised service.

When an O2O, as an independent platform, enlists so many business partners in a short period of time, there will be hidden problems seeping through the cracks. Edaixi, an on-demand laundry service for example, was inundated with complaints and had a PR crisis when many of the local laundromats they partnered with handled customers poorly.

Moreover, Rome was not built in a day. There are simply some things that are missions impossible for fledgling startups. Many online grocery delivery services were forced out, because unlike conventional supermarkets, they do not own a fleet of refrigerated trucks or have time to build a good cold chain. Keeping fruit and vegetables fresh is way too challenging. As of March 2015, only 40 out of 4,000 grocery delivery O2O businesses have turned a profit, Xinhua reported.


“I don’t recommend buying fruits online. they look so pretty in the pictures but rot like garbage when they arrive,” well-known Chinese screenwriter, Liuliu’s rant against’s grocery delivery is echoed by thousands of users on Weibo, a Twitter-like social networking site.

Despite the above reasons causing much bloodshed amongst O2O businesses, industrial experts say that’s how the market plays. Wu Shichun, a Chinese angel investor and founder of Meihua Angel Venture Capital, told NetEase that by 2015, he believes 80% of Chinese O2O startups will die, and China’s recent stock market crash may have a chilling effect on venture capitalists, turning them more conservative and “stingy”. But a capital freeze can spell spring for good projects. “Entrepreneurs may get down to the real business instead of speculating on the craze. Their visions become clearer during hard times,” Wu said.

(Charts produced by Jing Gao at AllChinaTech. )

Jing Gao

Jing founded her own blog Ministry of Tofu and worked with Los Angeles Times, Greenpeace and LinkAsia. She graduated with a master's degree in Journalism from the University of Illinois.


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