July 12, 2024

Investment Opportunities in the B2B Industry from a Baibu Perspective

Investment Opportunities in the B2B Industry from a Baibu Perspective

This blog is a translation of the report from https://pdf.dfcfw.com/pdf/H3_AP202105101490815862_1.pdf. I found the report extremely helpful and insightful, so I decided to translate it into English to help it gain more exposure.

As the economy shifts from a phase of rapid growth to one of high-quality development, many sectors are caught in a competition over existing stocks, making it increasingly necessary for companies to reduce costs and improve efficiency through refined operations. This need has driven rapid development in the corporate services industry. The first two articles introduced the current development status and investment financing situation of the corporate services industry. Although the overall development is positive, given the complex and vast corporate services market, we cannot help but consider which sub-sectors will grow rapidly in the future? Which areas have entered a highly competitive red ocean? What are the trends in these areas? After organizing investment and financing data and interviewing mainstream industry institutions, the Zero2IPO Research Center has selected four sub-sectors with significant development potential — databases, cloud services, digitalization of corporate operations, and industrial Internet (B2B platforms) — for in-depth analysis. This article focuses on the B2B industry, and the other three sub-sectors will be released soon. Please look forward to the Zero2IPO Corporate Services Series Research Report.

Industry Status

The B2B trading platforms discussed in this article refer to the business model where products, services, and information are exchanged between enterprises through the internet. Depending on the target audience, these platforms can be divided into vertical B2B trading platforms and comprehensive B2B trading platforms. The former specializes in specific fields, such as steel, textiles, and clothing, while the latter serves multiple industries and fields as e-commerce websites.

The scale of B2B e-commerce transactions in China is growing rapidly, but the growth rate is declining year by year.

According to the China E-commerce Market Data Monitoring Report, the scale of B2B e-commerce transactions in China was 25 trillion yuan ($3.45 trillion) in 2019, an increase of 11.1% year-on-year. As the e-commerce industry gradually becomes saturated, the growth rate of B2B e-commerce scale has declined compared to previous years but is still in a stage of rapid development.

China’s B2B e-commerce transaction scale from 2013 to 2019

B2B trading platforms have moved from the 1.0 information service stage to the 3.0 supply chain integration stage.

Zero2IPO Research Center based on publicly available information, January 2021

1.0 Information Service Stage

  • Business model: Mainly provides information services, connecting supply and demand through information and news. The main business model is information yellow pages.
  • Revenue model: Membership fees, advertising fees, technical service fees, etc.

2.0 Transaction Service Stage

  • Business model: Besides information display, it also meets the online transaction needs between enterprises, introducing models such as self-operation, matchmaking, and consignment.
  • Revenue model: From traditional membership and advertising fees to transaction service fees, self-operated transaction price differences, etc.

3.0 Supply Chain Integration Stage

  • Business model: The service content extends from matchmaking transactions to the upstream and downstream of the industrial chain, providing a series of high value-added services including warehousing, financial credit, big data analysis, etc.
  • Revenue model: The revenue model becomes more diversified.

In the late 20th and early 21st centuries, the internet entered China, and B2B platforms that could shorten supply chains and reduce costs quickly emerged, giving rise to companies such as HC Group, Made-in-China.com, and ChemNet. In the 1.0 era, B2B trading platforms mainly provided information services, connecting supply and demand through information and news. The primary business model was information yellow pages, generating revenue through membership fees, advertising fees, and technical service fees. After the 2010s, with the development of internet technology, electronic payments, and credit systems, the B2B 2.0 era focused on online transactions. During this period, B2B trading platforms not only displayed information but also met the online transaction needs between enterprises, introducing models such as self-operation, matchmaking, and consignment. The revenue models expanded from traditional membership and advertising fees to transaction service fees, self-operated transaction price differences, etc. Representative companies include 1688, Zhaogang, Baibu, and DHgate. In recent years, B2B trading platforms have further updated and iterated, extending their services from matchmaking transactions to the upstream and downstream of the industrial chain, expanding from a single trading platform to the C2M and even smart factory fields, providing a series of high value-added services such as warehousing, financial credit, and big data analysis, entering the 3.0 supply chain integration stage. By integrating the supply chain, B2B trading platforms have diversified their revenue models, with additional services such as data, information, logistics, and finance all capable of generating profits.

B2B Development Space is Greater in Industries with Long Supply Chains, Unstable Supply Relationships, and Many SKUs

Generally, in industries with large scale, numerous small and medium-sized enterprises, unstable supply relationships, long supply chains, and many SKUs, the development space for B2B trading platforms is greater. Therefore, in China, industries such as textiles, fresh agriculture, energy and chemicals, industry, and fast-moving consumer goods (FMCG) have many B2B enterprises, and the equity investment market also has relatively high activity. Typical B2B trading platforms include Baibu, Meicai, Zhaogang, Mobi, ZKH, and Yijiupi.

Chinese B2B Trading Platform Overview

B2B trading platforms have many sub-sectors, each with different industry characteristics and entry methods. Zero2IPO takes the current popular investment track — the textile industry B2B — as an example for in-depth analysis.

B2B Textile Industry

The Textile Industry’s Long Supply Chain, High Fragmentation, and Low Transaction Efficiency Have Given Rise to B2B Trading Platforms

From the industrial chain, it can be seen that China’s textile industry has a long supply chain, high fragmentation, and low transaction efficiency at various stages. The upstream industry is the yarn market, with many small and medium-sized enterprises, showing characteristics of low market concentration and concentrated production areas. For example, the total market share of the two listed companies, Bailong Oriental and Huafu Fashion, was less than 1% of the total revenue in 2018. The midstream fabric market includes the production of greige fabric and the printing and dyeing stages. China has about 20,000 greige fabric factories with low market concentration, and most greige fabric factories have low barriers. Popular fabrics are easily imitated and produced, leading to severe homogeneity and fierce competition. The downstream clothing industry is labor-intensive, with low barriers and low concentration, and strong personalized demand on the procurement side, making it difficult for supply and demand to match efficiently. Additionally, there are many levels of fabric wholesalers between the midstream fabric market and downstream clothing manufacturers. The industry’s characteristics bring many inconveniences to buyers and sellers and have also given rise to the establishment of B2B platforms.

Buyer Pain Points

  • Many types of fabrics, hard to find
  • Many procurement steps, lack of transparency in unit prices, high costs
  • Inconsistent quality of fabrics, hard to guarantee quality
  • Long production cycles for fabrics, unable to meet flexible supply chain demands
  • Inability to track procurement progress in real-time, low efficiency

Seller Pain Points

  • High customer acquisition costs
  • Inconsistent customer credit, difficult to settle accounts
  • Many demands for small batch customization, unable to achieve economies of scale
Case Study — Baibu

Baibu can be considered one of the successful cases of B2B in the textile industry, addressing numerous pain points in the textile industry, standing out among B2B enterprises, and receiving a significant financing of $100 million in 2021. The following text will comprehensively analyze Baibu’s growth history, business model, and reasons for success, serving as a reference for investment in the B2B industry.

Baibu, founded in December 2013, is China’s first internet company dedicated to reforming the traditional trading model of the textile industry. To date, more than 5,000 shops have successfully settled in, and the number of purchasers has reached over 20,000. Baibu’s original intention was to link upstream suppliers, establish a standardized fabric information database, and use accurate technical systems for efficient matching, connecting originally highly asymmetric upstream suppliers and downstream demand, completing the transaction loop. So far, it has completed 9 rounds of financing, with a valuation exceeding $1 billion. The investment institutions behind it include Yunqi Capital, Source Code Capital, Chengwei Capital, Tiger Global Management, China International Capital Corporation (CICC), and Digital Sky Technologies (DST).

Baibu’s Financing Journey

After six years of development, Baibu’s business has expanded from a B2B platform to two major business segments:

1. Baibu Model: A textile finished product trading platform that links primary wholesalers with downstream small and medium-sized garment manufacturers. By improving supply and demand matching efficiency through a fabric database, and supplemented with integrated warehouse and distribution networks, logistics management, financial services, and other value-added services, it provides comprehensive supply chain management.

2. Quanbu Model: Connects upstream greige fabric factories and downstream finished fabric wholesalers through AIoT and SaaS, creating an intelligent cloud factory for greige fabric production. Specifically, in the Quanbu model, downstream orders are first classified and aggregated, then disassembled and distributed to greige fabric factories by the system. After completion, the orders are reassembled, quality checked, and delivered to customers.

Baibu Business Model
Quanbu Business Model

It is worth noting that in June 2020, Baibu signed strategic acquisition agreements with Juxi and Zhiliangnet. Juxi’s main business involves textile management software such as ERP and Warehouse Cloud, while Zhiliangnet has a complete MES production management system and fabric quick production platform. After this acquisition, Baibu’s cloud factory and intelligent weaving service capabilities will be further enhanced, achieving digitization of the entire process from orders, finance, production, warehousing, and logistics.

After detailed analysis, Zero2IPO Research Center believes that Baibu’s success is mainly due to two points:

1. Choosing the right industry and entry point. China’s textile industry has characteristics of large scale, long industrial chain, high degree of information asymmetry, and many product SKUs, providing significant development space for transaction-oriented B2B enterprises. According to a report published by the China National Textile and Apparel Council, in 2019, large-scale textile enterprises in China achieved operating revenue of 4.94 trillion RMB. The upstream and downstream markets each have different issues: in the upstream yarn market, the raw material procurement and finished product distribution chains are long; in the midstream fabric market, severe homogenization and a significant distance between manufacturers and the market lead to supply-demand mismatches, easily resulting in inventory surpluses; in the downstream clothing industry, strong personalized demand on the procurement side makes it difficult for supply and demand to match efficiently. Addressing these pain points, Baibu adopted a self-operated model and developed two major businesses, Baibu and Quanbu, offering high-quality, low-cost, sufficient quantity, stable delivery, and strong continuous supply services, breaking the original information asymmetry in the textile industry, achieving efficient matching and completing the transaction loop.

2. Possessing full-chain digital capabilities, effectively integrating resources, and improving industry competitiveness and profit margins. As mentioned above, Baibu manages and operates weaving production capacity through AIoT + SaaS, significantly improving production efficiency. In the finished fabric transaction link, it establishes a standardized fabric database for the industry, achieving automated and intelligent matching of transactions, and provides comprehensive supply chain management. At the same time, the industrial chain management further extends to the front end, enhancing the creation of intelligent weaving factories, possessing comprehensive integration and management capabilities for the entire industrial chain.