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2022-05-04 12:14:14 Voices

This article is the second in a series in which Chinese experts share their thoughts on the deterioration of the country’s social media spaces. The first can be found here.

There are few things that venture capitalists love more than a good buzzword. They talk about identifying influencer-like “key opinion” leaders and customers; instead of holding meetings, they bring everyone into “alignment.” And, among VCs in China, conversations frequently drift to the massive opportunities presented by the “xiachen market.”

Although there’s no agreed-upon definition for what qualifies as a xiachen, or “submerged” market, the term generally refers to consumers in small cities, counties, and rural areas.

Twenty years ago, when the internet was just taking off in China, entrepreneurs focused their attention on capturing consumers in major cities with large, educated populations like Beijing, Shanghai, and Shenzhen. Coincidentally, these cities were also home to the lion’s share of Chinese VCs and founders. Understanding the needs of their target audiences was easy, since they were often the same as their own. Conducting market research could be as simple as visiting a nearby store and making a bullet point list of what they found.

Thanks to China’s sheer size, even limiting their attention to large cities gave early tech firms a potential market of 400 million, a population larger than that of the United States. But low-hanging fruit doesn’t stay on the tree for long. After costly price wars — most of them ending in mergers — a small group of tech giants came to dominate China’s large urban markets.

Unable to compete, startups turned their attention to the country’s other billion residents. Some of the more successful xiachen ventures include e-commerce giant Pinduoduo, news content aggregator Qutoutiao, and short video platform Kuaishou, which are known somewhat sardonically in tech circles as the “three xiachen treasures.”

The winners of China’s first-generation tech wars, under pressure from investors, have also jumped on the xiachen bandwagon. Brands like Alibaba’s Taobao e-commerce marketplace have spent huge sums expanding their businesses in rural areas, fighting Pinduoduo for market share.

In theory, conquering xiachen markets requires internet companies adapt their strategies to better fit rural residents’ consumption habits and lower purchasing power. In practice, it often boils down to slashing prices and cash payouts. For example, while both ByteDance’s flagship news and community content platform Jinri Toutiao and the more xiachen-centric Qutoutiao rely on an ad supported free-to-download business model, the latter also encourages users to click on and read news by handing out “red envelopes” that can be exchanged for real money.

These methods can be controversial. In some cases, internet companies seem to lean into stereotypes about rural or less educated users outside of major cities by increasing the frequency of notifications and promoting lurid or salacious content. According to a report by Chinese business news outlet LatePost, after an office worker in Beijing set his location on a news aggregator app to a smaller city in the central province of Henan, he received more than 40 recommendations over a four-hour span, most of them for stories related to sex, violence, or accidents. Qutoutiao ads in rural areas play up the app’s clicks-for-cash feature with copy like, “Read Qutoutiao, earn drinking money.”

Looking at the bigger picture, there’s a whiff of neo-colonialism embedded in the way VCs view untapped xiachen markets. Whether through financial rewards or low-quality recommendations, internet companies’ xiachen strategies often reflect a biased view of rural and small-town internet users. They’re framed as places to be exploited — their residents backward and easily contented.

Part of the problem is that many of the founders and product managers leading the charge in xiachen markets live and work in big cities and never spend more than a week in the towns and villages where their target audiences live. Their business decisions are based on crude assumptions like the idea that consumers in rural areas are highly price sensitive but don’t particularly care about quality.

Their business decisions are based on crude assumptions like the idea that consumers in rural areas are highly price sensitive but don’t particularly care about quality.

Yet China’s economic development varies not just between large cities and the countryside, but also within so-called xiachen markets themselves. Visit rural areas in the country’s northeastern “rust belt” and you’ll find villages with good infrastructure and well-stocked supermarkets and villages where hardly anything is for sale.

The more successful xiachen-centric companies recognize this. Colin Huang, founder of Pinduoduo, one of the big winners of the xiachen push, went on record criticizing the term in an interview with the business outlet Caijing: “Only people inside the Fifth Ring Road (in central Beijing) would call this group xiachen.” He went on to say that residents of China’s capital “aren’t able to understand our core clientele.”

Perhaps that’s why Pinduoduo is the biggest winner of China’s xiachen craze, even as its CEO rejects the buzzword and the phenomenon it describes.

Meanwhile, the term also creates artificial tension between xiachen and non-xiachen users. Longtime users of the Quora-like Q&A platform Zhihu, for example, often complain about the decline in quality of answers in recent years, as the app has been flooded with low-quality content and advertisements. One of the most popular explanations for the trend is that it’s a natural consequence of “Gresham’s Law,” which states that “bad money drives out good money”: Open registration, increased smartphone adoption, and a decline in the average quality of users have all combined to make Zhihu almost unrecognizable.

In this telling, the responsibility for Zhihu’s decline lies with the users, not the platform. However, if you visit Zhihu’s home page, you’ll find it is full of recommended content, vacuous rankings, and videos, all of which are likely more detrimental to the site’s user experience than an influx of supposedly low-quality users from xiachen markets.

Ultimately, the concept of xiachen markets is more misleading than illuminating. It makes no attempt to understand people who live in China’s vast expanse of suburbs, towns, and villages, and it fails to elicit loyalty from the users it purports to serve.

Translator: David Ball; editors: Cai Yineng and Kilian O’Donnell; portrait artist: Zhou Zhen.

(Header image: Livestreamers crowd around Cheng Yunfu, a popular noodlemaker, Fei County, Shandong province, March 25, 2021. Tian Ming/VCG)