For the past two years, Uber had been engaged in a costly war against Didi Chuxing, a local competitor, for market share in China. After more than $2 billion in cash losses Uber threw in the towel and has agreed to sell its China business to Didi. In return, Uber will receive a 20% minority stake in Didi as well as a $1 billion USD investment and both CEO’s will now be a part of the rival company’s board of directors.
The competition started in 2013 when Uber formed Uber China and entered the Chinese market. Uber had the backing of local investors, it hired local experts and tried to work with the national government. At this point in time, Uber was competing against two taxi hailing apps: Didi Dache and Kuaidi Dache. Both apps were well established among users and drivers but had mostly been engaged in a costly war against each other.
This changed in 2015, the two companies announced a merger and Didi Kuaidi was born. This merger meant that the newly formed Didi Kuaidi had the backing of both Alibaba and Tencent, two major China players. Around the same time, Baidu decided to invest in $1.2 billion in Uber. In 2016, Apple invested $1 billion in Didi Kuaidi. Uber was losing, both in market share and financially. Uber had been down nearly $1 billion a year due to subsidized rides to encourage people to use its app. And only a few days after ride-hailing apps were legalized in China, Uber and Didi announced their big news.
What should you make of it?
There have been thousands of articles all with different takes on the news claiming Uber has surrendered other who claim it’s a success. So which is it? What are foreign companies wishing to enter the Chinese market making of it?
After the failure of Google, Facebook and Twitter, Uber appeared to be doing everything right. If even they couldn’t crack China, can anybody? Some see it as a sign that Western companies, despite all their efforts, are doomed to fail in China. The merger was a way for Uber to leave China with a large consolation prize. The ride-hailing market is unique in that there is much to gain even without winning the market outright. It certainly should not be used as a model for other sectors. This could signal that the only way to succeed in the market is to partner with a local company. This would help foreign companies gain a better understanding of the cultural, political, and economic environment, as well as the risks involved.
Although many Western companies have failed to successfully enter the Chinese market, many believe that Uber ultimately won big and that there is much to be learned from their venture into China.
First, it is important to understand that errors were made along the way. Uber thought they were doing everything right, they had formed a separate Chinese company, they were cozying up to the government, they hired local experts and they even had the backing of Baidu! So what went wrong?
Uber encountered plenty of speedbumps, the first being Google Maps. Uber relies on Google Maps to locate drivers and riders, but Google Maps is blocked in China. Uber redesigned the software and began working with Baidu to use Baidu Maps.
Uber then began offering subsidies to capture more of the market. But competing on price in China can be a dangerous strategy. Subsidies did not work well with Uber’s business model; typically Uber takes around 25% of the fare and the rest is kept by the driver. But in China, Uber was paying the drivers a multiple of the passenger’s fare, so the company was losing money on most rides. Didi was also offering subsidies, but only in cities where Uber was present (Uber has operations in 50 cities, Didi in 400).
As if there wasn’t enough keeping them busy, Uber also had to deal with scammers. These scammers would create fake passenger accounts and appear to take a ride with a driver. The driver would be paid when in reality the ride never took place. Nearly 3% of rides during summer 2015 were fraudulent. Uber has to spend hours each week checking driver logs to detect evidence of fraud and decide if that user should be deactivated.
Analyzing where other companies have failed helps any company wishing to enter the Chinese market but it is also important to understand how Uber won from their merger. Uber spent $2 billion in China and that has now turned into a merger worth about $7 billion. Didi is poised to become one of China’s largest tech companies and the value of Uber’s stake in the company would increase exponentially. This also allows Uber to focus its development strategy on other prospective markets such as India and Indonesia.