Why Capitalism Isn't the Villain in China's Food Delivery Crisis || Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we explore China in depths to reveal unique perspectives. Hello. Capitalism is practically become a running joke online in China. When domestic issue arises, people point fingers at the capitalism for international problems. They blame the American empire. This has become a reflex in Chinese public discourse. But let's be honest, are the hardships faced by Chinese people today truly the result of capitalist exploitation? Would dismantling capitalism really improve their lives? In this episode, we'll dive into the data to uncover who's really exploiting the Chinese people? We'll focus on the food delivery industry where resentment runs deep and take a close look at Muan, China's leading delivery platform as our entry point. Is Mtoan the primary corporate behind exploitation of delivery riders? Let's examine Maidtoan's profit structure. Their financial reports have changed and they no longer separate the profit margins for their food delivery business. Instead, they group it under a broader category called local life services, which includes things like group buying and hotel bookings. This market is difficult to pinpoint the exact profit margin for their delivery operations. However, a JP Morgan report from April analyzed the profit margin of nine major global food delivery platforms and estimated Maywan's margin to be lower than many might expect, just 2.8%. That means for every 100 yen spent on a delivery order, Mtoan owns earns only 2.8 8. While Maidtoan's profit margin is slightly higher than some other platforms in the report, it's not by much. The highest was actually Uber Eats. And why isn't me, China's long-standing number two delivery platform included? Because Earl Me's profit margin is negative. They are operating at a loss. Although Mtoan is profitable in this delivery business, the room to increase rider pay is limited. Their financial reports don't break out the delivery revenue specifically, but they do detailed the income and expenses for delivery riders under their delivery operations. Surprisingly, Mtoan is losing money here. In 2023, Maidwan's delivery service revenue, the fees charged for deliveries, was 82.19 billion yen. But their delivery service expenses, meaning payments to riders, totaled 19.74 billion yen with 22 billion delivery orders that year. The average delivery fee paid by customers was about 3.7 yen per order. While Maidtoan paid riders 4.1 per order. So on delivery fees alone, Mtoan is losing 40 cents per order. When a customer pays 3.7 yen for delivery, MTON sells out 4.1 yen to the rider, taking a small loss. This shows there's a little room to improve rider benefits. As mentioned, the maidan is still profitable overall with that 2.8% margin. So, where does this profit come from? It's mainly from commissions charged to merchants and advertising fees they pay. The advertising parts is straightforward. those restaurants at the top of your app, they are paying for that placement. Commissions are the percentage MTON takes from each order a restaurant fulfills. If we we if we want to mate, the so-called evil capitalist, to give up some profits, commissions seem like the places to start. But how much are they actually taking? There is some disagreement here. Some claim Mtoan charges a 30% commission, but the company says it's only 6% to 8%. Who's telling the truth? I lean towards Mtoan's figures. For a publicly listed company, outright lying about financials, especially on something like this carries significant risks. It's unlikely they take that chance. For comparison, consider Door Dash, North America's leading delivery platforms. Store Dash has a three commission tiers, basic, priority, and premium with the rates of 15%, 25% and 30% respectively. Even their lowest tier is well above Muan's reported rates. Now, you might be wondering, China's food delivery industry is undeniably convenient, but it's also created what we might call a delivery dilemma. It's a grueling industry where no one seems content. Restaurants are suppliers are squeezed by maidan's commissions making it tough to stay profitable. Consumers often pay a health price. Delivery food hygiene standards are notoriously poor. And the restaurants sometimes use lowquality ingredients. Remember that inspection of lamb skewers that found the pork, duck, and even mink meat but no lamb. Delivery writers meanwhile are working themselves to exhaustions every day. and platforms like Mtoan and Earl Dami, they are either barely profitable or in some cases losing money. Looking at the entire delivery ecosystem, it seems like everyone is struggling. So where is the root of the problem? Let's break down the cost structure of a delivery order. Imagine you are hungry, don't feel like cooking, and order a 20 yen meal. Who in the chain can afford to take less? It's hard to see anyone who can. A 20 year order is a split among mate one, the restaurant and the rider. The restaurant itself has costs like a labor, ingredients, and rent. Based on our earlier figures, the delivery fee is about 3.7 and with the maidan's average commission of 7%, that's another 1.4. So 5.1 of that 20 order is already gone. This doesn't account for the restaurant's advertising for all promotion costs, which could drive expenses even higher, potentially without the limit. For simplicity, let's assume no promotional costs. That leaves the restaurant with 14.9. According to Chinese catering industry reports, ingredients typically account for 40% of a dish's price, labor 20%, and the rent 25%. For a 20 UN order, that's 8 Y for ingredients, 4 Y for labor, and 5 Y for rent. Add it up and the restaurant's cost reach 17, more than the 14.9 they receive. At this point, the restaurant is either breaking even or losing money. So, what can be cut? There is not much flexibility. riders could theoretically take a pay cut, but their 3.7 yen per order is already so low that the further reductions would be unsustainable. The main way to save costs now is through efficiency. Like Mwtoan's group meal feature, what about Maidtoan's commission? There's some room to reduce it, but not much. With a 2.8% profit margin, Mtoan earns about 56 cents on a 20 order. You could ask them to lower their commission to say under one year, but that wouldn't significantly change the situation and expecting a company to operate without any profit seems unreasonable. That leaves restaurants as the primary target for cost cutting, which is exactly what's happening in China. Restaurants are cutting costs on rent, ingredients, and the labor. Reducing labor costs often means using pre-made dishes. Cutting rent means operating out of a ghost kitchens without the storefronts. Cutting ingredients cost means using lowquality materials. These are the root cause of many issues in the delivery industry. But clearly this race to the bottom isn't what the Chinese consumers want. Yet there seems to be no other area to cut costs. So what's really going wrong? Why is China's food delivery industry trapped in this vicious cycle? I see two main issues. Starting with cost, it feels like there is no room to cut costs. But one area is often overlooked. Rent. Rent is a massive burden for restaurants in China, far higher than in other countries. In Canada, rent accounts for about 9% of restaurant costs. In the US, it's around 8%. In Japan, it's about 10%. But in China, the average is 25%. And in major cities, it can reach 50%. If China's rent costs were aligned with the places like Japan, Canada, or the US, say 9% of a 20 yen order, that will free up about 3 yen per order. That might not sound like much, but for a 20 yen order, an extra three yen could nearly double a rider's pay, significantly boost a chef's wages, or improve ingredients quality by 30%. Why is rent so high in China? Is it tied to exorbitant real estate prices? And what's driving those prices? Is it because building homes in China is costly? Are construction workers wages unusually high? Is it because Chinese homes are built to exceptional standards? Of course not. The real culprit is China's system of land finance. In a 5 million yen home, the government takes at least 1 million, sometimes as much as 3 million or more. According to a 2016 report from e- house, during the peak of China's housing market, land costs accounted for over 70% of home prices in first tier cities and over 60% in second tier cities. Without such high land prices, housing costs could drop by more than half, bringing commercial rent costs down to levels comparable with Canada or the US around 10% of total cost. High housing prices and the land finance don't just affect you when you buying a home. They impact everyday life like a hidden tax. In a way, food delivery itself is a workaround for this system of exploitation through high real estate costs. In China, both food delivery and e-commerce are far more developed than in places like Europe, the US, Japan, or South Korea. Why don't other countries embrace delivery services as much in the US or Canada? Low population density is part of the reason. But what about Japan, Taiwan, or South Korea, where population density is high? Why aren't their delivery service as widespread? In China, delivery and e-commerce thrive? Because they use cheap labor to bypass the high cost of renting physical storefronts. Another area for improvement in the delivery chain is the Chinese consumers purchasing power. Low prices are often seen as a strength in China, but sometimes they are a drawback. Lower housing prices would be great, but the low food delivery prices not necessary. What's the average per person price for a delivery order in China? There is no precise figure as Muan only reports average order prices which includes group orders. However, after MTON introduced its group meal feature, a 21st century business herald report estimated the average per meal price to be between 25 and 30 y. This low price point limits the profitability of China's delivery industry. At a 25 to 30 yen per meal, it's hard to use high quality ingredients or pay riders. Well, if consumers were ordering meals in the 40 to 50 yen range, there would be much more room to improve ingredient quality and writer compensation. Some might say, and that's nonsense. Are you saying I'm eating poorly because my income is too low? If I order 50 meals, will the food magically improve? I've been seeing plenty of lowquality 50 meals, too. Are you saying the reasons we are eating badly and the writers are treated poorly is because China's economy isn't developed enough? That's not the point. It's not about economic development. It's about the wealth distribution. Escaping China's delivery dilemma isn't about one person spending more. It's about raising society's overall purchasing power. that requires changes in wealth distribution. There are two types of distribution to consider. The first is between the state and individuals. The second is how individuals allocate their spending. In China, individual incomes are low compared to GDP due to heavy government extraction. China's per capita disposable income is about $5,700 or 43% of per capita GDP. In the US, it's $63,565 or 74% of per capita GDP. If China's disposable income to GDP ratio matches the US, income could rise by 71% boosting purchasing power accordingly. Someone earning 10,000 yen a month could be earning 17,000 yen without the government's heavy hand. With that kind of income increase, the average delivery order could rise from 20 to 30 Y to 40 to 50 Y. The other issue is how individuals spend their money. China's prices are a mix of high and low. The government extracts wealth through real estate and minimal welfare, resulting in Swiss level housing prices, American level health care costs, and a Southeast Asian level delivery prices. Chinese people spend too much on housing, retirement, and education. Things that shouldn't cost so much and not enough on essentials like food. To address this, the government must reduce its exploitation through real estate and improve welfare programs. If that happens, Chinese people could afford pricier delivery meals even without a significant income boost, potentially resolving the delivery dilemma. In summary, there are two solutions. Lower housing prices by reducing government land finance exploitation and improve wealth distribution. Both boil down to reducing the government's grip on society. That's the practical solution, not a campaign against evil capitalist. As we've seen, Mtoan's profit margin are a slim 2.8%. Even if they gave up all profits, it wouldn't make much difference. This episode focused on the delivery industry. But isn't this true across Chinese industries? Before delivery became the target, real estate companies were in the spotlight. With developers going bankrupt and unfinished buildings piling up, they became easy target for public anger. But are real estate companies raking in huge profits? Not really. From 2015 to 2024, Everrand's weighted profit margin was negative 26%. Country gardens was 5% and a bank was 8%. They are making some profit but it's limited compared to what the government takes through the land finance. Their earnings are insignificant. You may know the Marx quotes. With 50% profits, capital will take risks. With 100% profit, it will all human loss. With 300% profit, it will commit any crime, even risk the gallows. Critics of capitalism love to cite it. But where are these massive profits? Matron's barely scraping by with just over 2% and as soon as they started making money, JD.com entered the market. If Matron and JD start, the price war made profit will likely drop this year. When real estate was profitable, everyone rushed into it. Marx's idea of 50% profits is unrealistic in a competitive market. Those margins don't exist. If they did, capitalists would flood the industry. The only place you see 50% profits is with the government through its monopoly on land sales. I'm not here to defend Mtoan or Everrand, but Chinese people need to recognize who's really behind their struggles. Capitalists exploit, but they are just tools used by the elite to exploit ordinary people. Mtoan helps the government to squeeze workers. Everrant, country garden and bank facilitate wealth extraction through land finance. In China, there are three groups. The elite, the capitalist and the people. The people are exploited. The elites are the source and the capitalists are the tools. Right now, Chinese people are focused on hating the tools instead of those wielding them. Like blaming the butcher's knife instead of the butcher. This is deliberate. Whenever exploitation becomes too intense and the social tensions rise, the government pushes a capitalist forward to take the blame, presenting them as the villain for people to vent their frustration on. But this approach solves nothing. For a while, people bought into this. The government points at Alibaba's jack and everyone piles on. Then it's Ever Grand Shua Ing's turn and the crowd follows. Next, it will likely be Maywan and the people will jump on that bandwagon too. But what's the result? Attacking JMA didn't end 996 work culture. Attacking Shu Jaing didn't fix unfinished buildings. Attacking Maitan won't resolve the delivery dilemma. It's all the same. It doesn't change the reality of exploitation. The key is understanding who's truly exploiting you and what's causing these social issues. Historically and today, China's core conflict isn't between landlords and the peasants or capitalists and the workers. It's between officials and the people. Officials exploit. And when they go too far, people rebel. In the past, the landlords were scapegoats. Now, it's capitalists. As social tensions rise again, the government is repeating this tactic, shifting blame to capitalists. People follow, directing their anger at them. It feels satisfying, but it solves nothing. A movement against capitalists will only prolong suffering. Chinese people have been misled by this once. Don't let it happen again. Fool me once, shame on you. Fool me twice, shame on me. Thank you so much for watching. 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