By Cameron Turnbull

Advances in mobile technology and app development have given rise to a new business model that has profoundly affected the transportation, ecommerce, and lodging industries. The sharing economy refers to third-party online service providers that help businesses and individuals turn excess supply into revenue by linking them to consumers via online platforms. With high levels of mobile use and a rapidly expanding consumer class, China has been quick to adapt to the sharing economy, presenting tremendous opportunities for those who embrace new technology and business models.

An Introduction to the Sharing Economy

Enterprises in the sharing economy create value by monetizing surplus resources. For example, Airbnb quickly became a global phenomenon simply by providing a platform where users could earn extra income renting out unused rooms. The company identified an underserved market in the budget traveler and linked them to an under-utilized group of suppliers.

Companies in the sharing economy take many forms, but all take advantage of similar crowd-based networks and mobile/online technology to operate. They exist in a unique sphere of the market economy that sits somewhere between personal and professional, work and leisure, employee and entrepreneur. While this ambiguity largely benefits the users of sharing platforms (both suppliers and customers), it has drawn the ire of tax authorities and traditional transportation and lodging companies in many countries.

Sharing economy enterprises often come under fire for a lack of responsibility. Uber’s policy to count their drivers as independent contractors, not employees, is an example often cited by critics. While companies’ are typically required to provide employees basic insurance and benefits, they are not required to do so for independent contractors. Many people feel Uber enjoys full time labor from their drivers without taking full responsibility for their well-being.

Furthermore, with companies such as Airbnb insisting that they are simply a “communication platform,” they often absolve themselves of responsibility when users experience quality or safety problems. Taxi companies, hotel chains, and other companies that operate in the traditional sphere of the service economy feel that it is unfair for sharing platforms to participate in the industry without incurring the same costs brought about by safety regulations.

The ambiguity presented by many sharing platforms makes regulation and taxation difficult for policy makers. Some business models in the sharing economy can conflict with existing regulatory frameworks. For example, at what point should traditional bed & breakfast regulations apply to an Airbnb host? Does it depend on the number of days the guest stays? The amount of revenue generated? The services provided? Furthermore, politicians in the United States and Canada have accused sharing platforms of giving entrepreneurs an unfair advantage over traditional service providers.

China’s Sharing Economy

While the concept originated in the United States and Europe, the sharing economy has yet to become fully accepted by both consumers and authorities in the western world. Meanwhile, China is emerging as a leader in the sharing economy. In March, China’s National Information Center published a comprehensive report on the conditions and future development of the Chinese sharing economy. This is significant for two reasons: it shows the size and success of the sharing economy and the government’s willingness to embrace and develop it.

As of 2015, the sharing economy in China was US $299 billion (RMB 1.956 trillion), and it is expected to grow 40 percent over the next five years,  making up 10 percent of China’s total GDP.  Several of the biggest sharing economy success stories have come from  mainland China, such as Didi Kuaidi, which was valued at U.S. $7  billion in 2015. In the near future, it’s expected that 5-10 new large scale sharing economy companies on par with Didi Kuaidi or even Alibaba will develop in China.

The report is also significant because it symbolizes the Chinese government’s willingness to embrace the sharing economy and actively play a role in its development. While western governments have seen the development of the sharing economy as a challenge to be controlled, it appears that Chinese authorities view the sharing economy as a tool for economic development. Reports suggest China could be one of the first countries to establish consistent and appropriate tax codes for the sharing economy, as well as create legislation for tracking and punishing abuses related to consumer safety and fraud. Large companies also stand to play a role in developing the Chinese sharing economy, with Tencent, Lenovo, and LinkedIn all indicating their support for the Commission on the Sharing Economy in China (CSEC).

Opportunities for Foreign Companies

Pony Ma, the founder of Chinese online leader Tencent, has recently pointed out that China’s sharing economy is on the verge of a golden age. He may be right;  the Chinese sharing economy is filled with potential. China is home to 620 million cellphone users, and when surveyed, 94 percent of people said they are willing to share online – the highest rate among all countries surveyed. The Chinese economy still has many new consumers entering the middle class who do not have to readjust from a traditional ownership-based consumption model– a fertile environment for growth of the sharing economy.

As the Chinese sharing economy matures and receives continued government support to develop, it is possible we will see more resources becoming “sharable.” Once you start looking for it, excess supply is everywhere. Recently, Lenovo expressed interest in creating a sharing platform that would utilize the company’s facilities and distribution channels to help start-ups in their product development. Baidu CEO Robin Li also spoke about sharing the firm’s AI technology and big data capabilities with other firms to fuel tech development.

Finally, new technology and applications constantly threaten to disrupt the sharing economy, and the regulatory landscape can change rapidly. As such, foreign firms need to be keenly aware of the development of the sharing economy, and consider how they can use the various sharing platforms to their advantage.

 

This story was originally posted on Asia Briefing Ltd., a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visitwww.dezshira.com.

Posted by Cameron Turnbull