By Sherman So and J. Christopher Westland

Editor’s note:
This article has been adapted from Red Wired: China’s Internet Revolution co-authored by Sherman So and J. Christopher Westland. The to-be-published book is aimed at helping readers gain a firsthand understanding of how the Chinese combined successful components from their Western counterparts with innovation to accommodate the unique characteristics of the Chinese market.

With money raised from venture capitalists, Oracle consultant James Liang and investment banker Neil Shen set out with technical expert Qi Ji and veteran travel agent Fan Min to build the Chinese answer to Expedia, the US online travel leader, just as the Internet bubble was bursting.

They set up a website, but real business did not come until they bought a local travel agency, built a call center and started dispatching promoters to places with high concentrations of travelers, like airports and railway stations.

By the time Ctrip was founded in 1999, millions of travelers had already discovered the World Wide Web. Travel had been revolutionized – people were booking their own hotel rooms, hunting for the cheapest fares to Paris and everywhere else, and swapping travel tips with strangers around the globe via this new electronic means. 

That was the same year software giant Microsoft spun off its highly successful subsidiary Expedia.com. Started just four years earlier as an Internet experiment, the website, which allowed users to book airlines and hotels online, was so popular that it quickly became a multi-billion-dollar business.

The Internet’s broadly distributed and easily accessible environment is the ideal foundation for new travel marketplaces. People who had scarcely traveled before were presented with a vast array of choices at prices that seemed unimaginably cheap.  They loved the freedom of being able to do their research and make their bookings whenever they liked. Forget 9 to 5 Monday to Friday – they could now book their dream holidays 24/7. 

However, for Liang and his partners, there was just one problem: Most people in China had yet to go online. How could they get them to visit Ctrip.com?

The Internet arrived at China just a few years before Ctrip started. By 1999 there were about 2.1 million Internet users in the country of 1.3 billion people, or roughly 1.6 people per 1,000, according to government-backed researcher China Internet Network Information Center (CNNIC). 

Over 90 percent of Chinese used the Internet to check emails and instant messages. Only 15 percent had tried any form of e-commerce or online shopping. The odds of them going online and booking a hotel in 1999 might be close to zero.

Their website was ready by November that year. But China was not ready for a web-centric operation like Expedia.com. And so, before their newly established start-up fell apart, they had to quickly find an alternative way to get customers

The Transformation

“Around June or July 2000, Ctrip changed its model. The company said it was going to buy up traditional travel agents and focus on hotel bookings,” said a venture capitalist who invested in Ctrip. “I liked the transformation. I thought that would work under the current business environment in China. So, we gave them the money, even though the Internet bubble had crashed and we stopped investing in many other firms.” 

This was the second round of Ctrip funding. It raised about $11 to 12 million in November 2000. They had already burned through the $3 million raised in the first round. “Without that crucial investment, they would be gone,” said the venture capitalist.

With the newly raised funds, Ctrip bought up a traditional travel agency specialized in hotel bookings in China called Beijing Modern Express Corporate Travel Service, to have existing customers and some revenue. At the time of the acquisition, the travel agency had a monthly business volume of about 30,000 hotel room-nights.  Ctrip went on to buy a few more travel agencies, which gave it the scale and the required licenses for its business.

But the growth rate of a traditional travel agency was too slow and the margin was too low. Ctrip needed triple-digit growth to satisfy its venture capital investors.

The founders had another idea though – why not send people out to office buildings to distribute pamphlets promoting Ctrip’s services? Many companies promoted products and services this way in China – salespersons went door-to-door in downtown office buildings to solicit business.

But the result was not satisfactory, recalled Fan years after. “How many people would be planning to go on a trip right at that moment?” The concentration of travelers in a normal office was too low for the plan to succeed. The formula had to change.

1) First, instead of office buildings, why not go to areas flooded with travelers? They sent their promoters to transportation hubs, such as airports, train and bus stations

2) Second, instead of insisting people book through the website, why not give customers a number to call? People at airports and railway stations didn’t have easy access to the Internet, but many had their mobile phones. By August 2001, China had 120.6 million mobile phone users, the largest number in the world, though that is still just one out of every 10 Chinese¹.

3) Third, a call center would be needed to support the operation, not just a website.  Most of the world’s online travel agents give customers a number they can call – but that is usually just for exceptional situations. In Ctrip’s case, the opposite is true. The website is the exception, and the call center, which handles more than 70 percent of the reservations, is the rule.

¹ From Ministry of Industry and Information Technology of China.

The Triumph

By 2001, Ctrip ceased to be a typical online travel agent, becoming a trailblazer in China.  

It broke even in March 2002, only about two-and-a-half years after it started. Sales accelerated to over $12.1 million in 2002 from a mere of $724,000 in 2000. 

It became one of the largest agents for hotel accommodations in China. By December 2004, it had registered over 1 million customers. It was booking 400,000 room nights and 180,000 air tickets every month.

With a brilliant financial record, the company listed an IPO on the Nasdaq in December 2003. Ctrip’s stock price shot up over three times its IPO on the first day of trading.

The venture capitalist’s bold bet paid off handsomely. He sold his holdings in Ctrip two years after the company listed on the Nasdaq, making a 16-fold profit on his investment.

Though Ctrip is not strictly an “Internet business”, it has enjoyed Internet-like growth because it found a market that had previously not been well served – China’s new business travelers.

Ten to 15 years ago, there were few small businessmen traveling around the country in search of clients, suppliers and partners. Nowadays, managers of companies in China travel like their counterparts in the US and need fast and reliable services at competitive prices, which is what Ctrip offers. Business travel accounts for 80 percent of Ctrip’s profits.

Competition

Serious competition for Ctrip did not come until mid-2001. eLong, a travel information site co-founded by Justin Tang in 1999, focused on hotel booking in mid-2001, as Ctrip’s business model, featuring on-site promoters and a call center proved its worth.

And like Ctrip, eLong enjoyed rapid growth. Its hotel booking volume increased from approximately 389,000 room-nights in 2001 to approximately 1.032 million in 2003.  eLong became the second-largest online travel agency after Ctrip, with about half as much business volume. 

When Expedia.com came looking for a foothold China in 2004, it eyed eLong, even though it was only marginally profitable. Expedia acquired 52 perceent of eLong in two rounds of investment, effectively making eLong its China branch. eLong was also listed on the Nasdaq in October 2004.

However, eLong wasn’t as efficient as Ctrip. Analysts at Morgan Stanley compared their performances. They found Ctrip produced 40 percent more sales per employee than eLong, and its operating expenses per employee were only 60 percent of eLong’s. It also generated 80 percent more sales per contracted hotel than eLong.

An industry insider said that eLong’s platform was never designed to support a large-scale operation. For example, if Ctrip receives 5,000 calls an hour from customers, only 10 or 15 are likely to have problems.  But if eLong receives 5,000 calls in an hour, 3,000 will have problems, said the industry insider.

Tang quit eLong one year after Expedia took over. Expedia appointed its own CEO, but even after several changes of management, eLong still has not attained profitability.

By 2008, eLong was no longer a serious threat to Ctrip. Ctrip continued its spectacular growth of 30-40 percent a year, compared with an annual growth of 12-14 percent in the overall China travel industry. 

In 2008-9, Ctrip acquired 18.25 percent of Home Inns for $92 million², a budget hotel chain it once started and then spun off.  While this could pave the way to future growth, most analysts believed Home Inns was competing in a tough environment.

While Liang’s team could make Ctrip’s operation stand out from other online travel agents, they could not do the same with Home Inns, although they pioneered the concept of budget hotel chains in China. Home Inns’ competitors, or imitators, could come up with better services and lower prices.    
 

² Ctrip Annual report 2008, p11.

Chart: Market share of online travel (2008)

Source: Analysys International
Note: by revenue

Chart: China’s online travel market (2007-2013F)

Source: IDC