Hospitality exchange service Airbnb announced this week a deal with China Broadband Capital and Sequoia China to elevate the American Internet company's brand to Chinese travelers.

The West is rightfully infatuated with Airbnb. The service allows travelers a cheaper and wider array of accommodations around the globe, and it provides income to home owners who act as hosts. Both foreign and domestic travelers in China need the same service, and Chinese property owners desire a similar type of incremental revenue.

And Sequoia appears like a good partner. It's run by Neil Shen, who was online travel company's chief financial officer when it went public almost 13 years ago, and then a few years later he led Chinese budget hotel chain Home Inns to their IPO. Neil would be a top guy to work with in China for any travel-related business importing its wares.

Airbnb's growth inside China faces hurdles. Airbnb has competition and regulations inside China that will not totally be surmountable. Companies like form important cornerstones of the domestic market. Can anyone name a foreign Internet company that has ever been able to grab the top spot in a specific vertical? Yahoo failed repeatedly. Google failed. LinkedIn is doing fine, but is not the top site in its sphere. And many more foreign Internet companies never got the chance to fail because of Chinese censorship or scope of business blockades.

And Airbnb won't be able to earn its top spot in the domestic travel arena either because of local protectionism from both government and industry. Large property developers like Wanda are tight with local governments, and these property titans own many of the hotels in Chinese cities. Any substantial push into cities that robs property developers' hotels of revenue will be met with new laws. Chinese city halls and business administration bureaus are not places where Airbnb can put up a fight.

Next there are the security and safety components related to registration of travelers. Don't forget that anytime a traveler stays at someone's home or at a hotel, they must register with the local police. If a traveler stays at a hotel in China, the mandatory check-in scanning of passports or identifications are for the public security bureau's database. And if a traveler stays at a friend's home for even one night, the friend is legally required to also register the traveler's arrival.

Most people safely ignore the rule (or don't even know it is a rule) if they visit a friend's home in China, but this rule may prove cumbersome for Airbnb hosts who should notify the local authorities each time a guest stays with them. If Airbnb is smart, they may solve this by either creating a system online that automatically registers the guests on behalf of the host with local police; or Airbnb can create devices similar to what hotels use for hosts to register and notify local authorities when guests arrive. But will many Chinese hosts (or guests) be happy that the local authorities have been notified?

A notification to authorities may arise issues of taxation. Each time money exchanges hands, a legal invoice (known as a "fapiao" in China) must be given by the seller to the buyer. What happens if a traveler needs the official, legal invoice from a host to get reimbursement later from the traveler's company? Who issues the fapiao? Airbnb could issue these to travelers, but then they will be taxed instead of the host. But the host has revenue coming in from the stay, so they should pay a tax or have Airbnb pay on their behalf.

Though many of these invoicing issues are already handled well by Chinese e-commerce firms like Taobao or Ctrip, they will not translate equally to Airbnb because the company is a foreign firm no matter how far they plan to localize their operations. In China retail, there was a double standard for many years where foreign retailers like Wal-Mart or Carrefour needed to issue legal invoices by default at the point of sale, but Chinese firms like Jingkelong got away with not issuing the invoices unless requested by the customer. That meant the foreign firms had to report much more of their taxable sales revenue to local Chinese tax bureaus. The same taxation and revenue issues may face Airbnb.

But Airbnb is not only focused on the domestic Chinese market. The company wants to capture the outbound China traffic as well. Airbnb Founder and CEO Brian Chesky blogged that "Chinese travelers [are] increasingly coming to Airbnb to tap into our global network of hosts in over 191 countries. In just the past year alone, outbound travel from Chinese guests through Airbnb has grown 700%, making it our fastest growing outbound market."

If Airbnb is truly going to be a top choice for outbound Chinese travelers, both hosts and guests need to be prepared for travel visa issues. Many embassies in China require validation of travel from Chinese citizens prior to issuing visas. A hotel is a semi-reliable source as a destination, but can an Airbnb host's home also serve as a legitimate destination? There may be some hiccups in navigating these problems, but ultimately the momentum of Airbnb's business model will create a solution.


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