HONG KONG (Reuters Breakingviews) - A Chinese rival offers WeWork a turnaround blueprint. Like Adam Neumann’s office-sharing outfit, over-expansion at the smaller Beijing-based Kr Space led to a cash crunch. The company has started selling office services to corporate clients across the People’s Republic. A similar pivot will not salvage WeWork’s plunging valuation, but it could stem losses.
The We Company, which may run out of cash as early as next month, is in talks with backer SoftBank for a rescue package that could value the business at just $8 billion, according to Reuters. But well before its initial public offering failed last month, Chinese peers were already grappling with similar funding woes. Slowing economic growth and weak demand in the People’s Republic pushed up office vacancy rates across 17 major cities to a decade-high of 21.5%, according to third quarter figures from commercial property group CBRE.
That has squeezed the likes of Kr Space, which operated a WeWork-style model of signing long-term leases - often in pricey commercial districts - and renting out trendy shared spaces for short term usage. But bruising price wars and a venture capital funding slowdown primed the sector for a downturn. In the first ten months of 2018, 40 office-sharing brands closed down in the country, according to one estimate from a Chinese industry association. Kr Space slashed jobs, closed locations, and halted expansion.
Yet founder Liu Chengcheng is proving nimble. In May the entrepreneur secured a 1 billion yuan ($141 million) financial lifeline from backers including IDG Capital at an undisclosed valuation. The company refocused on catering to larger corporate customers, such as $12 billion local advertising giant Focus Media, and offers services like opening, designing and managing offices. Since Kr Space partners with landlords, it can keep new lease obligations to a minimum. It’s early days, but the new strategy could show results quickly: the upstart is on track to turn cash-flow positive by end of the year, according to someone familiar with the company. Local rivals are adopting Liu’s strategy too.
WeWork’s new bosses might consider following them. Corporate customers currently make up less than half of total memberships; that’s an opportunity to address. The company has put mainland expansion plans on hold, according to media reports, but that doesn’t mean it can’t learn from China.
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