The situation for Uber in China is now dire.
- They are still quite small (+10 cities).
- Kuaidi and Didi, their two gigantic Chinese competitors, are merging (+350 cities)
- The government is now raiding / “visiting” Uber’s offices on almost a weekly basis.
Uber is now in the situation you never want to be in in China: a foreign company on the wrong side of both government and powerful local competitors. Ask Google and Yahoo how that worked out.
However, Uber can still win in China. They have one last move that could reverse the situation. Basically, they can do what Kuaidi and Didi won’t. They can ignore Jack Ma’s advice and marry the government.
Alibaba Chairman Jack Ma has famously said “Never, ever do business with government. Love them. Don’t marry them. So, we never do projects for government.” Coincidentally, Alibaba is a major investor in Kuaidi. Compare this to statements by Kuaidi’s CEO Joe Lee, who said “One thing we learned is if we want to grow fast, we need to make sure the government supports us. Because in China, they can stop you in one day — they shut down your server and you’re out.”
Kuaidi and Didi have succeeded in China by taking both bits of advice. They have effectively coordinated with the government to avoid confrontation and to get access to State assets (i.e., the taxis). That is what got their taxi hailing services to +350 cities, with a reported 6M riders per day. But, per Jack Ma, they have also been unwilling to partner or merge with local governments or taxi SOEs. So they are dating the government but they won’t marry.
Some examples of their “date but don’t marry” approach:
- Prior to launch, they coordinated with the government and state-owned taxi companies about their planned transportation services (taxi hailing vs private ride sharing vs licensed ride sharing).
- Upon launch, they ignored ride sharing and focused on free taxi hailing. Instead of competing with taxis, they helped drivers make more money. And while the taxi companies did lose some dispatch fees, they were not facing major new competitors. Overall, they did not enter as disruptors or competitors to the existing state-run system.
- In Shanghai, they even integrated their hailing services into the operations of the four major State-owned taxi companies. When a taxi driver accepts a Kuaidi hail, the light on the car (in theory) automatically switches to “Occupied”. Their apps actually hook into the the local dispatch centers.
- However, when the Suzhou government banned all taxi-hailing apps that weren’t tied to the SOE dispatch companies (basically all private sector taxi apps), Didi exited that market. Kuaidi begrudgingly stayed and is working with the city’s “unified platform”. They are basically the back office for the local SOE’s own hailing system. This is the situation they don’t want: State-owned taxi hailing competitors.
Date-but-don’t-marry is a common strategy in highly political Chinese industries. You can see it in the banking, insurance, telecommunications, and energy industries in particular. And these strategies can be exceptionally profitable.
And that is the opening for Uber. As they can no longer beat Kuaidi and Didi in the market, they should do the government deals their competitors won’t.
They should partner with local governments and local State-owned taxi / dispatch companies. Through joint ventures or technical agreements, they can help them develop their own taxi hailing apps. Make the SOEs direct competitors to Kuaidi and Didi. One thing that can trump Kuaidi-Didi’s network economics is SOE competitors with local government monopolies (and technical partners). Ask SAIC-GM and SAIC-Volkswagen how that works out.
And this is actually a large opportunity. While Suzhou and Shanghai may have some ability to build their own taxi hailing (and one day ride sharing) platforms, this is an anomaly. Other cities (China has +600 cities with over 500,000 people) have no ability to do this.
One approach would be to do a series of JVs or technical agreements in a single geographic region, such as Yunnan and Sichuan. Uber could lock up the major local cities, get to scale in that region through taxi hailing – and position themselves for private ride sharing (still not allowed but the next big opportunity).
In my book (One Hour China Consumer Book) and research, I focus on the intersection of competitive advantage and State capitalism. I call Uber’s particular situation “Giants, Dwarves and the State”. When a market is politicized but also offers strong competitive advantages, three types of players usually end up emerging: Giants, who dominate the market; Dwarves, who struggle on the fringes and the State, which is deeply involved and sometimes a competitor (shown below).
So if you can’t be a Giant, your best move is usually to exit or hook up with the State. But you don’t want to be a dwarf. That is basically Uber’s situation and choice today. I will go into this more in Part 2.
Cheers from smoggy Beijing, Jeff