The 1 Thing Uber, Expedia and Netflix Need in China

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Last week, it was reported that Uber is raising $1 billion for its China business. That is impressive and a good strategy.

But, just yesterday, their gigantic Chinese competitor Didi-Kuaidi responded by announcing they are raising $1.5 billion.

That little back-and-forth is a great example of how competition in the Chinese internet often works. People tend to think it is about rules for foreign versus local companies. But it often comes down to who wants it more. Or to put it another way, to who is willing to suffer the most.

The one thing that Uber, Netflix, Expedia and others need in China is total commitment. A willingness to go all in. And a willingness is suffer and bleed for years if necessary.

In practice, that means:

Matching the capital of very well funded Chinese competitors.

  • Many new Chinese markets are won by who is willing to spend the most money and suffer the largest losses. And the days of foreign companies having a capital advantage are over. After all the write-offs and losses, the last company standing usually gets the market.

Delegating control to local managers.

  • You have to let go and let your local managers do what they need to do to compete. That means letting them change your business, your products and your brand.
  • This is extremely hard for most CEOs living in the West. But the Chinese Internet space is too fast. If you are running decisions back to the US, you will be too slow.

Burning your boats behind you.

  • You have to live and die with your China business. Because that is how your Chinese competitors see it. China is not optional for them. They have no Plan B. They will sacrifice anything to win. You have to do the same. Once you arrive, burn your boats.

Most Western companies are not willing to make this sort of total commitment. They will put in some money but eventually will stop matching the endless spending of their Chinese competitors.

They will delegate some control to local managers but are unwilling to let them make rapid daily changes to the products.

And, most importantly, they are unwilling to suffer for a long, long time. Eventually after years of losses, they will give up and go home.

And Chinese competitors know this.

They know that if they keep upping the capital requirements, upping the losses (hello, price subsidies) and upping the pain level, most Western companies will eventually go home.

A good recent example of this is Expedia, which has just walked away from its China business after ten years. While the company was one of the winners through their ownership of eLong, they were still taking losses of about $25M per quarter. They sold out. And local competitor Ctrip bought up a big part of their eLong stake.

Which brings us back to Uber. Their new China fund is the right approach. Their competitors Kuaidi-Didi won in taxi hailing in large part because they spent $600M subsidizing rides. The question now is will Uber keep matching Kuaidi-Didi’s spending? Is Uber really willing to spend $5-10B in China over the next 5 years? They should be prepared to.

The other recent news is that Netflix has opened talks in China. For them, the situation will be easier as they have unique content and can avoid most of the competition. But if they decide to build their own direct streaming channel, they will have to make the same total commitment. That’s a particularly brutal space.

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