Industry Insights

Do opportunities for tourism B2B platforms still exist? 2017-05-10 17:09:43    

Alex Wang, Executive Director of Zuoyu Capital, explores the screening of big opportunities in B2B platforms for the tourism industry from the perspective of a tourism B2B model.

Do opportunities for tourism B2B platforms still exist?

Author: Zuoyu Capital, Alex Wang, Executive Director of Zuoyu Capital, Tourism Industry Research and M&A. Email: alex@zuoyucapital.com

2016, which has yet to come to an end, is destined to be a watershed year for the growth of China’s venture capital market, and tourism B2Bs are no exception. Over the last two to three years, numerous tourism B2B platforms have sprouted in the market, and leveraging the strength of capital, have experienced “great prosperity”, making waves in the tourism distribution sector. The onset of a severe credit crunch, however, led to a survival crisis for these platform, and there was even news that a number of tourism B2B enterprises have experienced broken capital chains. The author believes that B2B platforms being made obsolete will continue to occur.

Do opportunities for tourism B2B platforms still exist?

On the surface, the principal reasons for the broken capital chain for B2B platforms are that these companies have minimal governance and a poor sense of risk management and control. They have set the operational margin of safety at relatively low levels, or even lower than the legal threshold. Hence, business closure as a result of broken capital chain is a matter of course. At a deeper level, these companies have simply failed to build core competitiveness, hence it is inevitable that they will be booted out of the market well in advance.

In this case, what is a valuable B2B model? The author believes that the B2B’s value of existence must lie in helping to ease, rather than to add to the industry chain. This suggests that an innovative B2B model has to lead to greater efficiency, enhanced services and product upgrading for the industry chain as a whole. Let’s look at this in turn -

Raise efficiency

Raising efficiency is the entry-level requirement for a B2B platform. It is also a high-level target to which a B2B platform is required to continuously aspire. The author believes that there are two aspects to raising efficiency: information efficiency and capital efficiency.

Do opportunities for tourism B2B platforms still exist?

The path to raising information efficiency is to first resolve the issue of whether unidirectional information flow exists, i.e., at its most basic, coverage must extend to both upstream suppliers and downstream buyers so that suppliers’ supply and buyers’ demand are matched. The next issue to resolve is the quality (good and bad) of unilateral information, i.e., the platform suppliers and range of products are enhanced so that satisfying the demand of buyers may be maximized. This is followed by resolving issues pertaining to bidirectional information exchange, i.e., a genuine flexible supply chain is implemented. The demand of downstream users is fed back to the B2B platform via buyers. The B2B platform, upon compiling and consolidating the feedback, transmits it to upstream suppliers in the industry chain so that tourism products that are more consistent with market trends may be produced. Simple measures that depend on information and technology to help two transacting parties transact are already outdated. If these methods were to be used now, their value would have to be deeply discounted. What’s more, matching two transacting parties that could have transacted on their respective platforms in the first place is definitely an undesirable method.

The pain points of capital efficiency is extremely prominent in the tourism industry. On the one hand, lengthy payment terms and financing difficulties continue to threaten suppliers’ survival and reproduction expansion, while platforms or enterprises with abundant capital have relatively low capital utilization rates. This capital demand-and-supply has led to a vicious circle, which B2B platforms can break only through innovation; so let the professionals do what they’re paid to do. When B2B platforms grow to a certain size, the way forward would be to bring in third party factoring, asset securitization, foreign exchange management and other tools or cooperation with professional teams, all of which requires building on the foundation of large sample size and big data of B2B platforms.

Enhance services

Service enhancement is different from product upgrading. Products provide tourism experience and services to the end-customer, but the services referred to herein are supporting services directed at suppliers or buyers, which improves their operational efficiency and operating standards. The operations of every enterprise will face a variety of issues including brand, quality assurance, human resource, system, marketing, finance and tax, pre- and after-sales as well as during the sale, capital and even outsourcing; tourism enterprises are no exception. A significant value of a B2B platform lies in enhancing efficiency at this level.

Systems are often the measure and minimum standard adopted by platforms when entering the market, but simply providing a system may be far from being adequate in terms of building greater stickiness for each player. Platforms must gradually establish relatively comprehensive merchant services systems by way of proprietary R&D or working with third party service providers at the opportune time. Two examples are presented here for reference. The first concerns Chongqing TRAVELING BESTONE. By consolidating offline physical outlets through an almost-closed service system, the handling of their brand, VI, systems, financial management, training, supply chain, and even after-sales, has been standardized or centralized at the headquarters, creating a unique B2B ecology. The second concerns OCTOPUS, which set up a specialist services team to help carry out pre-/after-sales service for up- and downstream players, pooling and transportation of tourists, and emergency response handling, among others, raising merchant experience.

Upgrade products

Upgrading products, as the term implies, refers to the fact that the existence of tourism B2B platforms requires directly or indirectly changing the product mix of the industry. Upstream and downstream parties to the transaction are extremely fragmented, but both standardized and unstandardized segments in product procurement and consolidation exist. Platforms can synergize with suppliers to group standardized and common segments together for consolidated procurement and provide this to buyers. This will greatly benefit downstream cost structure and lead to improvements. In another scenario, small and medium-sized suppliers have limited ability to obtain scarce resources. B2B platforms can step in to resolve this, and raise the competitiveness of the platform ecology. Another way of product upgrading appears in some tourism sub-sectors, i.e., under the premise of full product deconstruction and grafting, the portfolio is repackaged, and new products that have not existed in the market previously are created, effectively filling market voids, and serving end-customers.

Product upgrading does not suggest or lead B2B platforms to be “both referee and player”. Rather, it stands at a higher level and provides better and more weapons and ammunition to upstream suppliers and downstream buyers, guiding the product ecology of platforms to grow in the direction that better meets market demand, and better optimizes structure.

Taking all of the above into account, a truly valuable B2B platform must be meticulously polished and relentlessly crafted by the team. It should begin with the system, as well as with resolving preliminary information asymmetry, followed by raising product and service strengths to create core value. Although Rome wasn’t built in a day, companies cannot simply chant slogans and rely on subsidies to gain transaction size, and then tell stories to seek financing for expansion; this won’t work. The author has always admired B2B companies that have the ability to earn smart money at an early stage because these types of companies have already set up refined business models and relatively high barriers to entry at the initial phase. By leveraging capital to scale up, these types of companies will definitely be industry leaders. In terms of market capacity, there is every chance that two to three unicorns can make their debuts in the market. Let’s wait and see.