4/4/2020 SoftBank-backed Oyo suffers major shortfall in ambitious Japan push - Nikkei Asian Review

STARTUPS

SoftBank-backed Oyo suffers major shortfall in

ambitious Japan push
Ensuing labor revolt raises WeWork-style concerns about loss-making Indian startup

ERI SUGIURA and WATARU SUZUKI, Nikkei staff writers

OCTOBER 25, 2019 19:52 JST

An Oyo hotel in Tokyo: The Indian startup is facing headwinds in the Japanese market. (Photo by Yuki Kohara)

TOKYO -- A massive shortfall in the aggressive Japanese expansion plans of

Oyo, the SoftBank Group-backed Indian hotel group, has snowballed into a
nasty labor dispute, the Nikkei Asian Review has learned.

Oyo Hotels & Homes, which seeks to become the largest hotel chain in the
world, entered Japan in April. It laid out ambitious plans to become the
country's largest hotel operator with a target of signing up 75,000 rooms under
its brand by March 2020, according to sources.

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4/4/2020 SoftBank-backed Oyo suffers major shortfall in ambitious Japan push - Nikkei Asian Review

As of Sept. 30, however, Oyo had signed up only 4,000 rooms, several people
close to the situation said. Labor representatives said Oyo's failure to meet this
"very unrealistic goal" had subsequently led Oyo to renege on some
employment contracts. In response to questions by Nikkei, an Oyo
spokesperson called the figures "unsubstantiated" but said: "We are not able to
disclose internal information on business plans."

Some staffers, especially in sales, were also asked to take 40% pay cuts,
documents reviewed by Nikkei showed.

Oyo's growing pains in Japan are another headache for investor SoftBank,
which this week agreed to bail out coworking startup WeWork by taking an
80% stake and providing a $9.5 billion support package. Like Oyo, WeWork
was highly ambitious, aiming for global domination of the shared-office space.

WeWork staffers now face the ax as the company massively scales back its
expansion plans. As part of a turnaround strategy, it will cut 4,000 jobs, or just
under 30% of its workforce, the Financial Times reported Wednesday.

At Oyo, employees say they are suffering because of the missed expansion
targets.

"The number of hotel rooms is very far from reaching the target," one company
executive said.

"Oyo has put an emphasis on increasing the number of salespeople in Japan,

believing that as long as they can secure a face-to-face meeting [with potential
partners] they will be able to sign contracts," the official said. "But it's not that
simple."

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4/4/2020 SoftBank-backed Oyo suffers major shortfall in ambitious Japan push - Nikkei Asian Review

Oyo, founded in 2013 by Indian entrepreneur Ritesh Agarwal, then 19 years

old, operates a franchise model by providing technology, brand and
operational know-how to hotel owners. The company claimed earlier this
month to be the world's second-largest hotel operator, with a portfolio of 1.2
million rooms, including homes, in more than 80 countries.

However, its Japan plans have stumbled. At the same time, investors have
begun to question its soaring valuation and lack of profits.

With SoftBank's mobile phone unit and SoftBank Vision Fund as its joint-
venture partners in Japan, Oyo originally aimed to surpass local hotel chain
Toyoko Inn, which has around 62,000 rooms, within a year.

However, as Japan has enjoyed a surge in room bookings ahead of the 2020
Olympics, Oyo has been unable to attract many hotels to its platform, as they
already have high occupancy levels. Oyo has also struggled to convey the
benefits of its technology-driven operation to hotel owners in regional areas
outside major city centers.

In emailed comments, an Oyo spokesperson said: "In Japan, we have in a short

span of 6 months already opened over 100 hotels across 50+ cities, a testament
to how our business is growing in the country."

Oyo went on a hiring spree that saw 500 employees join the venture in just six
months. Many of these employees, who signed up for full-time employment
with Oyo, actually began under contract to a headhunting company, with the
understanding they would be permanently employed by Oyo afterward,
representatives of a labor union formed to address staff grievances told Nikkei.

But Oyo later told some of those workers they might not be hired on a
permanent basis after all, while others were offered direct employment only if
they agreed to have their pay reduced by 30% to 40%.

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The cutbacks came as senior management was asked to keep a sharper focus
on Oyo's bottom line, given WeWork's floundering plans to go public and
growing investor unease about tech startup profitability generally.

"Oyo was told repeatedly by the director of human resources and by the
headhunting company that sudden changes of contracts are illegitimate," and
the company finally relented after SoftBank stepped in and warned against the
pay cuts, one labor representative said.

As of Thursday, Oyo had made 200 of the 500 workers direct employees.

Asked for comment, Oyo said: "There have been no salary deductions. In fact,
we have made several merit-based salary increases." Oyo added that "while
there were early cases where the intention of certain agreements were
misinterpreted, any outstanding ambiguities have now been resolved."

SoftBank declined to comment.

The development is the latest in a string of bad news that has clouded Oyo's
prospects as it continues to follow an aggressive global expansion strategy,
fueled by capital from SoftBank and its $100 billion Vision Fund.

In China, where Oyo claims to be the second-largest hotel chain after

launching just two years ago, local media have reported that the company is
planning large-scale layoffs. Oyo has said the reports are inconsistent, and that
it has hired over 10,000 employees in China.

Some hotel owners in India, its home market, have meanwhile complained of
hidden fees that were only discovered when they received their monthly
income statements. A group representing hotel operators in Bengaluru has
called for a criminal probe into Oyo, Reuters reported this month. Oyo has
denied the allegations.

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Despite any problems, Agarwal and SoftBank have continued to double down
on their expansion plans. Earlier this month, Oyo said it was raising $1.5
billion in a financing round, with $700 million coming from Agarwal --
reportedly supported by a consortium of Japanese banks and financial
partners. The remainder will be provided by existing investors, including
SoftBank.

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