Airbnb’s China problems — the soft spot in the vacation rental giant’s IPO prospectus

Business & Technology

Airbnb is going to list on Nasdaq. Here’s what you need to know about its exposure to China.

A screenshot from Airbnb.

Airbnb, the internet company that lets you make money from a spare room in your house or run a hotel empire by renting directly to travelers, filed for a Nasdaq IPO on November 16.

Airbnb’s registration statement notes the following about China:

  • The company intends to expand globally in countries where its “penetration is lower, such as India, China, Latin America, Southeast Asia, and tens of thousands of smaller markets and remote areas around the world.”
  • COVID-19 and “significant investments in new product and growth initiatives, including in China,” led to a worse-looking bottom line in 2020.  
  • There are different COVID-19 sanitation requirements in China than in other countries.

Then we get to the meat: “we have invested heavily to expand our operations in China, which is an intensely competitive market, both on the consumer side and from a talent perspective. We expect to continue to incur significant expenses to operate our business in China, and we may not achieve profitability in that market.” Other risk factors and problems:

  • Workforce “sentiment.”
  • China’s policy toward foreign direct investment.
  • Local laws and regulations, “which may be interpreted and enforced in ways that are different from our interpretation, and/or create obligations on us that are costly to meet or conflict with laws in other jurisdictions,” including China’s cybersecurity law
  • Deterioration in U.S.-China bilateral relations or escalation of geopolitical risk in China.
  • Actions by the U.S. government, “including through the use of Executive Orders or trade blacklists to ban or limit the use of services provided by Chinese third parties.”
  • Possible new Chinese regulations “restricting the transfer of personal data and important data outside of China…data localization requirements…[which] would incur substantial costs to comply.”
  • Risks related to Airbnb’s use of a variable interest entity (VIE) to conduct business in China that puts its legal status at the mercy of a Chinese partner.  
  • “[V]arious requirements and requests from government agencies to share information on users who use or offer accommodation services through our platform in China” for which failure to comply “may lead to impairment or disruption to our business and operations.”

What data will Airbnb share with the Chinese government?

The final bullet point above — the question of how Airbnb will deal with the Chinese government’s demands for user data — is the subject of a new Wall Street Journal piece, which says that operating in China “has sparked debate among the home-sharing startup’s senior leadership for some time.” Excerpt:

Airbnb hired Sean Joyce, a former deputy director of the Federal Bureau of Investigation, in May of 2019 as its first “chief trust officer,” a role that entailed protecting users’ safety on the platform.

He resigned six months later…Mr. Joyce grew alarmed during his tenure that the company wasn’t being fully transparent about the data it shares with the ruling Chinese Communist Party government, including for Americans traveling in the country…

In the summer of 2019, Chinese officials approached Airbnb with an unwritten request for more user data, including more “real-time data,” such as when a user first makes a reservation, said one person familiar with the matter.

[In response to Joyce’s concerns, cofounder Nathan Blecharczyk, who leads Airbnb’s China unit, is reported to have said:] “We’re not here to promote American values.”

Why there may be nothing to worry about: Before condemning Airbnb for being too willing to hand over user data to the Chinese government in exchange for a chance at the Chinese market (which “may not achieve profitability”), it is worth noting:

Every legal hotel in China is required to send identity information about every guest that checks in to the police, as soon as the guest checks in. The requirements for hosting foreign travelers are stricter than for Chinese nationals. If you book hotel rooms in China and then check in, the police are already hoovering up every bit of data about you that they can get from the hotel registration system. Airbnb’s data handovers may not be that different from what is required from the Hilton, Hyatt, Marriott, and other international hotel chains.

Why Airbnb customers and hosts should maybe worry: Unlike hotel chains, Airbnb began life as an internet company, and it remains a tech-first platform that excels in extracting data from its users, including their travel history, the places they want to visit, the property they own or lease if they are an Airbnb host, and their messaging history with hosts and guests.

The takeaway

Like any globally ambitious company, Airbnb wants a share of the action in China. And unlike many American internet companies, Airbnb’s service is not on the face of it, something considered sensitive by the Chinese government, at least not when compared with running a search engine or social media platform.

But any expectations that China might add to Airbnb’s bottom line should be tempered with the realization that Beijing could easily make market access more painful than it’s worth.