China On-Demand Update May 19, 2016

What happened What it means

Baidu and Holding (“Alibaba”) issue a and Alibaba want to steal customers from series of new commission policies. -backed -Dianping. In early April Links here, here, here, here, and here. 2016, Meituan-Dianping raised the commissions charged to restaurants and other businesses. Two weeks later, Alibaba said its food takeout app, Koubei, would become a full-service app, like Baidu’s Nuomi, and would not charge commissions. Baidu followed Alibaba by saying that Nuomi would also not charge commissions: “Baidu Nuomi will permanently waive commissions for the majority of industries.” Unlike Koubei, however, Nuomi will still charge commissions for the lucrative categories of restaurants and movie tickets. Nuomi and Koubei also added free services to help restaurants manage customers, plan sales and supervise supply chains. Meituan-Dianping has not commented on Baidu and Alibaba’s moves.

Baidu moves Nuomi’s profit model from Having cut commissions to match Koubei, Nuomi commissions to . plans to earn more through advertising. Baidu on Link here. April 26 announced that Nuomi would offer new advertising services to vendors. The announcement came the same day that Nuomi waived commissions for most on-demand service categories (restaurant commissions remain). The new advertising service, “Local Direct,” enables vendors more easily to advertise across Baidu’s mobile search engine, maps and Nuomi. Chinese media interpret Baidu’s move as emulating Alibaba’s successful e-commerce platform, Taobao, which earns through advertising, not sales commissions.

Meituan-Dianping boosts subsidies to consumers. Meituan-Dianping is subsidizing diners, not Links here, here, and here. restaurant owners. During a recent sales event called “Foodie Carnival,” Meituan-Dianping says it distributed RMB300mn (US$50mn) in cash subsidies to users. “Foodie Carnival” is a yearly food-themed sales promotion for on-demand services. From May 12 to 17, Meituan-Dianping distributed cash gifts and sold deeply discounted coupons. Baidu launched a similar event from May 10 to 18 but has not disclosed the amount of subsidies. Koubei did not participate.

Beijing tel +86.1390.118.6189. www.fathomchina.com pg. 1 China On-Demand Update May 19, 2016

What happened What it means

Meituan-Dianping wants to provide more back-end According to a leaked memo, Meituan-Dianping on May services to restaurants. 18 announced a new business unit that will promote a Links here, here, and here. “Restaurant Ecosystem Platform.” The platform will “promote the construction and standardization of restaurant vendor IT systems.” The move follows the company’s RMB100mn investment in late April into software company Passion Tec, whose full name is Beijing Pingxin Science & Technology. Passion Tec is China’s largest developer of software for restaurants, including enterprise-resource-planning software to manage payments, mobile orders and inventory.

Alibaba reveals that Koubei loses a lot of money but Alibaba has for the first time provided profit and loss not nearly as much as Meituan-Dianping. figures for Koubei. The move likely comes as Alibaba Link here. explains to investors why it is spending so heavily in on- demand services. Koubei is a 50/50 joint venture between Alibaba and its related party, Ant Financial Services Group, which is controlled by Alibaba Chairman Jack Ma. In the year ending March 31, 2016, Alibaba’s share of Koubei’s losses was RMB867mn (US$140mn). By comparison, Meituan-Dianping’s losses in 2015 were RMB10.5bn, according to a leaked financial document. The difference likely reflects the size of Meituan- Dianping, which is far larger than Koubei.

Taobao Movie raises RMB1.6bn and changes its Alibaba Pictures Group’s online movie ticketing name. platform, Taobao Movie, has changed its name to Tao Links here, here and here. Piao Piao following its first round of financing. The deal on May 15 raised RMB1.6bn from CDH Investments, Ant Financial Services Group and Sina.com, plus a few others. The deal values Tao Piao Piao at RMB13.7bn, and new investors hold 12.4%. The money will help Tao Piao Piao “step further into the movie industry supply chain.” Independent financing could presage a spinoff. Chinese media speculates that Tao Piao Piao will gain independence from Alibaba Pictures and could even list on a stock market. An unnamed Alibaba Pictures executive says the company “is still under Alibaba Pictures Group but it will have greater independence in decision-making,” according to First Financial Daily, a Shanghai-based business newspaper.

Beijing tel +86.1390.118.6189. www.fathomchina.com pg. 2 China On-Demand Update May 19, 2016

What happened What it means

Alibaba merges the back ends of its two food-takeout Alibaba is preparing to step up efforts in food apps, Eleme and Koubei. takeout. Restaurants that work with Koubei have been Links here and here. asked to sign a document confirming that Eleme will provide delivery services for orders placed through Koubei. A notification from Koubei to its restaurant vendors reads: “From April 20, Koubei Takeout’s vendor relationship and delivery services will be provided by Eleme. To ensure that your business is not affected please re-sign [a vendor agreement with] Eleme.”

Local food safety watchdogs are cracking down on Takeout apps could be vulnerable to food safety substandard restaurants that sell through food scandals. The city of Ningbo in eastern China takeout apps. investigated restaurants selling through food takeout Link here, here, and here. apps. Following the two-month investigation, health officials ordered apps to remove 1,200 restaurants. The city also ordered Eleme, Koubei, Baidu Takeout and Meituan Takeout to “conduct self-inspection and self- correction.” Food safety watchdogs in the provinces of Guangdong and Liaoning have taken similar action. All three investigations appear local; no evidence suggests they were ordered by the central government. China has not suffered a food-safety scandal involving takeout apps.

Beijing tel +86.1390.118.6189. www.fathomchina.com pg. 3