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For the Record, Uber Didn’t Lose in China.

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Uber’s sale of its China business to local rival Didi Chuxing is often referred to as a surrender. I think the numbers speak for themselves.

  • Uber invested 18 months and about $2 billion in China.
  • They walked away with 17% of DidiChuxing, and therefore 17% of the world’s largest on-demand transportation market.
  • This equity stake was priced at approximately $7 billion, marking it a tremendous return on both time and money already. But who knows what it will be worth in 5 years?

This is arguably the best any Western internet company has done in China since Yahoo ended up with 40% of Alibaba in 2005. That stake increased to over $40 billion. Although, in that deal Yahoo gave Alibaba its China operations plus $1 billion in cash. In Uber’s case, Didi gave them $1 billion in cash.

Uber’s two-year China adventure was a success. You don’t always get the gold medal. But a silver can also be great. This story also provides some good lessons for other Silicon Valley companies thinking about entering China.

Lesson 1: First mover advantage is really important.

In China, as in Silicon Valley, first-mover advantage is often the biggest factor in who wins. This is doubly true in the mobile space in China. The Chinese mobile startup market is arguably the world’s most innovative and it moves dramatically faster than in the West. Think three to five years from launch to victory, versus five to seven years in the West.

Late market entry was Uber’s biggest challenge in China. By the time it entered in late 2014, local taxi-hailing startups Didi and Kuaidi were already operating in hundreds of cities, with tens of thousands of drivers and millions of riders. Then they merged. Uber never managed to overcome this first-mover advantage.

Lesson 2: Have a concrete advantage. Be able to point to it.

Foreign companies should never enter the China market without a clear advantage, usually in the form of technology, brand power or foreign customers. A foreign company needs something locals cannot do as well. And it needs something to compensate for common political and “guanxi,” or relationship disadvantages. If a foreign company cannot clearly point to a concrete advantage, it should usually just stay home.

Uber’s advantages in China were solid but not fantastic. It had brand power, especially in Beijing, in Shanghai and within the expatriate community. It had some technological advantages. But unlike LinkedIn and Amazon, it did not have foreign customers. Unlike Bosch, it did not have cutting-edge technology that is hard to replicate. Unlike Apple, it did not have an iconic brand and almost unlimited reserves to spend on research and development and acquisitions.

Lesson 3: Have deep pockets and a long-term commitment to win.

China is cash-rich and local companies will often outspend competitors as a way of driving them out of the market. It is common for local companies to build massive capacity, as can be seen in factories, steel mills, and driver populations. This creates an oversupply and often creates financial losses for everyone. The market then becomes a contest of who can and is willing to bleed the most cash. The “last man standing” then gets the market. This scenario has played out in lots of Chinese industries, such as manufacturing, solar energy and online travel.

Uber faced just such a “last man standing” situation in China. They had captured a solid second position but were still bleeding $1 billion per year against Didi, which was also losing money.

“Last man standing” is often used against foreign companies, as they frequently retreat to their home markets. It can also be effective against venture capital-invested companies.

A lot of winning is therefore about a company’s real and perceived determination. If people think they can scare you off, they will start a moneywar with you. Companies that project hesitation often attract attempts to drive them out of the market. However, former Uber Chief Executive Travis Kalanick broadcast absolute determination to win in China. He came to win and wrote very large checks. And it worked. He was widely regarded as a serious China player who would match any company in endurance and capital.

Lesson 4: Don’t go to China alone.

Uber had another big China problem, which was its inability to build into the existing online ecosystem. Internet services in China are usually not stand-alone companies like they are in the US. Services are mostly integrated into the major platforms — such as those run by Tencent, Alibaba and Baidu

Competitors Didi and Kuaidi were deeply enmeshed in Tencent and Alibaba’s respective ecosystems. But Uber remained a solo company which was a disadvantage. The lack of integration with Tencent’s WeChat in particular was a significant problem. In contrast to the West, the Chinese internet tends to be a team sport.

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Overall, Uber was successful at capturing a solid second place in China – and was widely regarded as a serious, long-term and well-capitalized contender. This is what enabled them to clinch a good deal with Didi, the dominant China front-runner. And they did their deal from a position of relative strength. Walking away with 17% of the Chinese transportation market is something they would never have achieved 18 months earlier.

Many have written that Uber surrendered in China. This is true in a way. But Didi also surrendered to Uber. Didi was the winner but fighting Uber for the next five years was something they also wanted to avoid.

For Silicon Valley, Uber’s fortunes in China provide some clear lessons. If a foreign company wants to penetrate the China market, go early. Have a clear advantage and deep pockets. And have leadership that makes it clear the company is in for the long fight. This will position the company to either win or to do a good deal with the winner.

Thanks for reading, jeff

(originally published at Nikkei Asian Review, located here. Reprinted with permission)

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I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.

Top photo by Ian Sane, Creative Commons license with link here.

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