Will WeWork work in China?

Zhang Bangsong / Business writer, columnist, and consultant / 2016-09-23

Today, foreign companies understand that China is much more selective towards foreign investors and no longer impatient to see results; and also that the Chinese market is more open and diverse than previously thought. To make a profit in the largest and fastest-growing market in the world, companies have to provide products, services, and solutions that stand out, come up with a nonreplicable business model, and acquire the wisdom necessary for survival in this unique culture.

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“Do what you’re passionate about.” Adam Neumann, co-founder of WeWork, believes that people should work with enjoyment and passion, rather than wear away their enthusiasm in boring cubicles. WeWork defies rigid work space and order. You only have to spend half a day at a WeWork office to see how everyone there is living up to the spirit of that slogan. The enthusiasm is contagious, as if the people were on a Red Bull binge. It is difficult not to be affected.

On a Tuesday in September, Adam and his most important partner in China, John Zhao, Hony Capital CEO, were seen at the WeWork Yanping Road co-working space in Shanghai. The space was only launched on July 1 this year, but all rooms have already been rented out. Bookings for the other two locations in Shanghai being built are also strong.

John Zhao is the main force in bringing WeWork to China. In April, Hony Capital and Legend Holdings became lead investors, putting approximately $700 million into the company. It was not an easy decision. John Zhao and his team had to answer many questions, including the most challenging one: Is WeWork overvalued at $16 billion? Will the American company be able to succeed, or even just survive, in China?

WeWork in China: threats from copycats?

Sharing the title of “global giants in the sharing economy” with Uber and Airbnb, the business model of WeWork is the simplest among the three: Take out a lease on a floor or two of an office building, chop it up into smaller parcels, and then charge companies and individuals for monthly memberships. This sub-leasing model is easily replicable—even more so in China. There are too many lessons from the past. Groupon was soon drowned in a sea of Chinese imitators and ended up withdrawing from the country. Uber may be profitable in the United States, but in China, it was dragged into a subsidy war and was bought up by its Chinese imitator Didi. There are also rumors now about Amazon’s possible acquisition by a Chinese company.

WeWork’s shared office spaces are indeed unique. Its 160-strong R&D team uses the latest technology—Building Information Modelling (BIM)— to make the most out of every layout, corner and detail. Apart from optimizing space usage, WeWork’s workspace design creates a transparent, comfortable, open and social user experience. The distinct design and vibe are standardized and brought to every WeWork location. For a space that can house several hundred co-workers, like the one on Yanping Road, only a handful of onsite-staff is needed. Cost is reduced substantially. The ideal gross margin can be as high as 60%.

Yet, all added up, are subleasing at higher prices, unique replicable space design and services, plus low labor costs enough to justify the $16 billion? Is this enough to prevent WeWork from being imitated, or even surpassed, in China?

Those who are familiar with WeWork understand that while the physical design of the company is easy to replicate, its international community and resources are not. In fact, in terms of design and services only, many Chinese co-working spaces are equally matched. But WeWork boasts a global community of over 72,000 active members who share resources across borders. So far in this regard, WeWork does not have a serious Chinese rival.

Let’s say a New York-based WeWork member needs an access control system. If everything from design, development, manufacturing and installation is done in New York, it is going to be very expensive. But if the request is put to the WeWork community, the New York member may be able to find a Shanghai supplier offering lower prices. The person in New York saves money and the person in Shanghai expands his business to New York. It’s a good deal for both of them. WeWork says that 70% of its members find business partners in the WeWork community. Furthermore, members have access to other WeWork spaces and services around the world, such as in Shanghai, Hong Kong, Paris, London, New York, Tel Aviv, and Berlin.

WeWork doesn’t just offer flexible, hip, and cool office spaces. It is also a real-life social network. At WeWork, the physical space design is meant to facilitate socializing and communication. WeWork also has community managers whose bonuses are tied to the amount of connections that they build for members in a given month or year. Fostering a strong sense of community has become WeWork’s main strategy.

Adam himself is a man with great people skills, highly charismatic, and capable of getting people excited about things. He has learned a lot from his own life experiences, and is very perceptive when it comes to understanding others. A father of four, he attaches great importance to love and family. He hopes WeWork can go on to change the way people live, as well as the way they work. He believes having a healthy lifestyle is closely related to being productive at work.

The people who fall in love with WeWork and become our members are those who are passionate about what they do. “You can sense their enthusiasm and their devotion. This cannot be replicated,” says Adam Neumann.

Lessons from the past: arrogance leads to failure

However, in China, the situation is more challenging and complex than anywhere else. The reality is that the Chinese market is capable of disrupting any foreign-born business model. This is why so many business models that work perfectly well in other countries have suffered total defeat in China.

Luckily, unlike most foreigners keen for a share of the Chinese market, Adam Neumann knows very well what it is like to fail. WeWork was his fifth startup. The previous four weren’t exactly successes. Once, he attempted to produce children’s pants with embedded knee-pads “so kids won’t skin their knees when they crawl.” It was only after he had his own children that he realized how unnecessary that was.

This business attempt (which eventually failed) led him to China to look for manufacturers. He was able to know more about the local business environment. According to him, “nothing is worse than being unaware of the risks you face.”His experience convinced him to seek out the best investors and bankers in China and let them tell him whether WeWork had a chance here.

Humility is the most fundamental characteristic for anyone wanting to enter the Chinese market. Fully aware of the difficulties of navigating this market, WeWork decided to form an alliance with a domestic consortium led by Hony Capital. Numerous top companies have signed up for WeWork’s newest round of financing, including Legend Holdings, Jinjiang, Greenland, and several other famous entrepreneurs that chose to remain anonymous.

“Looking at Adam’s choice of investors, you can tell he really does understand China,” says John Zhao, CEO of Hony Capital and Neumann’s business partner. Zhao believes there are three prevailing trends in today’s world: a) China will be a key force in shaping the new global order; b) China will shift from being “The World’s Factory” to being a globalized market supported by domestic demand, the service sector, innovation and the creation of extra value; c) the technological revolution will bring about a new lifestyle and modes of production that feature a stronger sense of community, sharing, and democracy. Zhao makes his investment decisions based on these trends. WeWork’s business model also fits well with these trends.

Today, foreign companies understand that China is much more selective towards foreign investors and no longer impatient to see results; and also that the Chinese market is more open and diverse than previously thought. To make a profit in the largest and fastest-growing market in the world, companies have to provide products, services, and solutions that stand out, come up with a nonreplicable business model, and acquire the wisdom necessary for survival in this unique culture.

John Zhao, a seasoned Chinese investor, has visited WeWork in the US many times, always arriving at 9 or 10 in the evening. He saw, to his surprise, Adam and his staff still at work and full of energy. They work, they have fun, and they exchange ideas. “This is sharing at its best. This is where WeWork’s core competitiveness lies, and this is Adam’s greatest invention,” he said.

And so, it didn’t take long for Zhao to make the decision to invest in this young Israeli-American man’s “invention.” But how far will the company go in China? How influential will it become? Will WeWork be the next American company to succeed in China? We look forward to finding out.