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It may have been labelled as ‘our industry’s stupidest acronym’, but love it or hate it, O2O (Online to Offline) is here to stay. For those not in the know, O2O describes the converging of the online with the offline, which without a doubt has culminated in a technological revolution in China.

Both large and small e-commerce companies in China are having to adapt fast to incorporate O2O into their business models. But who are the winners here and who are the losers, and was Sun Tzu right about the capacity of ‘small forces’, over 2,000 years ago when he wrote ‘The Art of War’?

The most obvious winners are of course the power players, BAT (Baidu, Alibaba, Tencent) who have enormous market reach and capital to invest to expand their businesses.

But what about startups? Can the smaller players still pack a punch? I would argue yes – if the startup has a strong management team and business plan, key industry insights, and a clear niche in which to operate.

Challenges faced

Life as a startup in the O2O space is tough and resilience a must, as the competition from the likes of the BAT companies is fierce. Indeed, just trying to get off the ground can be difficult, especially as securing financing in China is becoming increasingly challenging.

O2O is a cash intensive business model, in that platforms will have to offer attractive discounts to boost customer numbers quickly. If the platform’s partners are willing to absorb the discounts, however, in exchange for the added exposure the platform provides, this can be a way to increase revenues.

Where the Chinese government has previously erred on the side of caution when it comes to overseas investment with their QFII scheme, it is fortunate that moves have been made to relax this approach somewhat. The government now allows full foreign ownership of some ecommerce businesses.

Some see this as a game changer for e-commerce, supplying the industry with tools to expand and sharpen its competitive edge. While these changes are a step in the right direction, more can be done. There are still government restrictions in place for public fundraising, and this limit in available resources can be frustrating, especially for a start-up living a hand to mouth existence.

Opportunities for investment

Despite China’s challenging investment climate, start-ups with a distinct and interesting business model can become the target of investment bids from companies seeking to boost their reach and strengthen their O2O offerings, as well as from competitors wanting to build market share.

Alongside other large players, Baidu and local listing site 58.com have been vocal about their plans to expand rapidly in the O2O space, with 58.com planning to invest in 100 O2O start-ups including homes decoration service To8to, on-demand beauty service Meidaojia and designated driver app eDaijia. Baidu also looks to invest more than $3.2 billion in O2O services over the next three years.

Consolidating resources

Be it a start-up or a well-established company, strong logistics networks are at the heart of a successful O2O business. Recent moves from e-commerce players to boost networks bear testament to this.

Take Alibaba, who earlier this year formed a strategic partnership with Suning – one of China’s largest bricks and mortar retailers. This enabled Alibaba to offer customers super-fast delivery options thanks to Suning’s valuable distribution networks and physical store presence.

Or look at food delivery company Ele.me, which is capitalising on its existing logistics networks and relationships, by expanding from the B2C market into the B2B market with Youcai, which links food ingredients sellers with restaurants.

For an O2O start-up, establishing the right logistics relationships for the business and working hard to make sure they run smoothly is crucial both for customer retention and growth, and ultimately for the success of the business.

While there is much movement in the O2O market, it seems as if consolidation is currently the name of the game.  Take for example competitors such as 58.com and Ganji’s merger earlier this year, or the recent Meituan-Dianping merger. This type of activity suggests that pooling resources is more effective than fighting over who controls O2O in similar markets.

Where to next?

These tie-ups seem like steps in the right direction, but is it too soon to tell? In such a new and rapidly developing industry as O2O, many companies seem to be jumping on to the O2O bandwagon, with no hard and fast guarantees of success.

Success may look different for each company, but I believe that the O2O ecosystem thrives from a mix of large businesses and start-ups, making it a richly diverse and interesting space for companies of all sizes.

Yes, this space can be a daunting place for start-ups, and some inevitably won’t weather the storm. For a startup, however, which is focused on consumer behavior and the ability to capitalize on the rise of mobile and the increasingly connected population in China, I would hazard a good guess that for startups, this is just the beginning.

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