Protocol | China

China’s $2.4 trillion shopping festival is more competitive than ever

Government scrutiny of "pick one from two" exclusivity deals has left 618 sellers free to list goods on multiple marketplaces.

The 618 shopping event takes over Chinese ecommerce starting in late May.

The 618 shopping event takes over Chinese ecommerce starting in late May.

Photo: Chan Long Hei/Bloomberg via Getty Images

China's mid-year ecommerce extravaganza known as 618 reaches its peak on Friday. Last year's event, which hauled in an estimated $2.4 trillion in consumer spending, signaled the economy's rebound from the coronavirus. This year's shopping spree is weighed down by a different concern: Beijing's antitrust crackdown on the country's internet giants.

Shoppers are more likely to find the same goods promoted across the biggest online superstores this year. That's because the longstanding practice of demanding exclusivity — known as "pick one from two" (二选一) in China — is under fire.

618 isn't even the largest shopping event in China — that's Nov. 11's Singles Day. But in 2019, 618 became a flashpoint for large marketplaces' exclusivity demands. Guangdong-based home appliance company Galanz took to Weibo to air its grievances: Alibaba's Tmall had removed its promotional banner after the company announced a partnership with Alibaba competitor Pinduoduo. Galanz noted a significant drop in traffic to its store, with searches for the brand name yielding no results on Tmall. The reason? The company said Tmall had asked Galanz to enter a "pick one from two" agreement in early 2019, and Galanz had refused. Galanz sued Tmall in November 2019 for "abusing its dominant market position," but later dropped the case.

This year looks different: Galanz, among many other brands, is promoting 618 across platforms, including, Tmall and Pinduoduo.

The exclusivity deals involved carrots and sticks. Marketplaces offered subsidies to boost discounts and promised traffic to brands' hot offers. But they also blocked stores and restricted traffic to sellers who didn't play ball. That's all changing: With China cracking down on its domestic Big Tech giants, no one wants to get caught looking like a monopoly.

In early February, the State Council, China's cabinet, finalized antitrust guidelines for "the platform economy," updating their rules for the modern internet age. New guidelines state that if a marketplace "abuses its dominant market position" by requiring brands to exclusively sell products there, that behavior may break the law. Last December, the State Administration for Market Regulation launched an antitrust investigation into Alibaba, China's largest ecommerce player, for its practice of preventing vendors from selling on other marketplaces. Alibaba was fined a record $2.8 billion in April.

As a result, "this year's ecommerce environment is more friendly," Wang Juntao, founder of TNO Water Drop Tea, told the Economic Observer, a Chinese financial publication. "This might be the biggest difference of this year's 618."

It doesn't hurt that this year's 618 extravaganza has been stretched into a near-monthlong affair — not unlike in America, where retailers start Black Friday discounts well before Thanksgiving. Presales began as early as May 24 on and Taobao. And the festival ends on June 20.

New entrants

What's also different about this year's midyear shopping event — a shopping bonanza invented in 2010 as an anniversary promotion — is two new entrants vying for consumers' wallets. Sensational short-video services Douyin and Kuaishou, which entered the ecommerce arena with space guns blazing not long ago, made their 618 debuts only last year. Douyin and Kuaishou now are the fourth and sixth largest ecommerce marketplaces in China by gross merchandise value, respectively.

According to a pre-618 survey conducted by the ecommerce-focused publication Ebrun, more than half of the surveyed brands said they would increase their marketing budget for 618 on Douyin. And over 22% said they would increase their promotional spending on Kuaishou. That's the biggest change consumers will see from the antitrust pressure on dominant marketplaces: It may become easier for new entrants to woo brands if sellers don't have to worry about getting punished for a lack of "pick one from two" exclusivity.

Still, size matters. Despite Alibaba's antitrust woes and the rise of social commerce, sellers still put their largest stock on Tmall. Two-thirds of the surveyed businesses considered Tmall their main 618 battleground. And 40% of them expected more than half of their 618 sales would come from Tmall.

During last year's 618 shopping event, total transactions across platforms reached $2.4 trillion, up 42% from 2019, according to Chinese online payment clearing house NetsUnion Clearing Corporation. If pre-618 sales numbers are any indication, this year's total turnover will likely smash records: Alibaba claimed that sales turnover on Taobao generated through livestreaming during the first hour of June 1 was higher than last year's daily average. And on the same day, claimed that over 4,800 brands saw their sales increase more than fivefold year-over-year.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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