CEO Travis Kalanick recently disclosed that Uber is losing over $1 billion a year in China. That’s the kind of big number that sticks in the brain – and gets a lot of press attention.
Here are a couple of other frequently cited “Uber in China” numbers:
- Uber is now in 22 cities in China – and in 2016 is planning to expand up to potentially 100. Note: Competitor Didi is reportedly in 360 cities, but much of that is taxi hailing.
- Uber globally has about 2M daily rides. Didi has 10M just in China. Although these numbers are somewhat questionable.
But I argue that the crucial number for Uber in China is actually 4,000.
That is Didi’s approximate headcount, which is way above Uber’s reported 200 staff in China. And while the current fight is for drivers, rides and capital, this war will ultimately be won in operations on the ground in China.
Here’s my argument.
Round one in Chinese transportation apps was a fight for taxi-hailing. That was the only available big market starting out. The young app companies helped people flag taxis and avoided a confrontation with the State-owned taxi companies.
Kuaidi and Didi exploded across China with this service (and then merged). Uber sat it out. Although, I have argued Uber can still get into this market through partnerships with local governments.
Round two has been about private ride sharing (i.e. drivers using their own cars). This is the other clearly massive opportunity in China but it is still a grey area legally (offices still being raided and drivers being arrested). Private rides are directly disruptive to the State-owned taxi companies, so this is much more sensitive politically. But both Uber and Didi are going after this opportunity regardless.
The key to round two is to get a critical mass of drivers and riders in each city. At a certain volume, your costs and wait time per ride drop and it becomes very difficult for new competitors to enter. The market consolidates and the leaders are protected by what economists call two-sided network economics (think credit cards and app stores).
Both Didi and Uber China are both now going for critical mass, mostly by raising capital and using it to subsidize rides. They are buying volume, to some extent. Hence, their much discussed capital raises and the large losses they have been taking. Uber is behind but they likely can access enough cash to get to critical mass across China.
And this brings us to round there, which is the fight for product development and operational scale.
Round three (just beginning) will be a a fight between those who achieved critical mass in round two. Didi and Uber (and maybe 1-2 others) will begin offering more and more services and tie-ins. They will rapidly customize and re-customize their products. They will do a flurry of partnerships and tie-ins with online and offline companies. And they will expand operationally across China, especially in sales, customer service and logistics.
Round three will be about services, product development and depth of local operations. (Note: I am writing this in a Beijing Pizza Hut where the menu has 37 pages of products – including “bacon wrapped quail eggs with abalone mushroom”. They also have an announcement for their 23 new products.)
That brings us back to the 4,000 number. Transportation app companies are basically engineering firms with a significant local operational component. It’s not just tech people sitting at a headquarters like Google. You have to build a nationwide operating platform. For example, Uber actually has the majority of their US employees located in cities around the country, not in San Francisco. These employees are either in driver operations (i.e., tech intensive logistics) or in community relations (i.e., coordinating and marketing to local populations of riders). This local operational component is a particular problem in China given the vast geography.
So to win in China, you need a nationwide operating platform and an aggressive product development capability. That will mean brainpower and lots and lots of bodies. Didi today has approximately 4,000 staff and very seasoned management. Uber reportedly has about 200 staff in China. That is a huge problem.
A side point. Chinese technology companies now have something that most Western Internet companies do not – brainpower in large quantities. For example, Huawei, the world’s leading telecommunications equipment company, has 170,000 employees. But over 70,000 of them are in research and development. The ability to deploy increasingly educated scientists and engineers in large quantities is a new capability emerging in China.
Another thing to look for in round three is a “capacity to suffer” (a Tom Russo term). Competition in China (online and offline) is often about who is willing to suffer the most. Everyone spends building factories and capacity. Everyone lowers prices. And everyone bleeds cash. The winner is often the one who is able and willing to bleed the longest.
A good example of this was the decade-long fight between ctrip and eLong (until recently owned by Expedia). While both got to scale early and had large marketshare, they had an ongoing war that caused ongoing losses. In early 2015, after losing about $100M in each of the two previous quarters, Expedia had finally had enough. After a decade of effort, they sold their stake in eLong and went home.
So as we head into round three, my questions for Uber would be:
- How are you going to get to 4,000 staff in China asap? How are you going to match the speed of product, service and operational improvements that are going to be coming out of Kuaidi?
- Are you willing to lose money in China for the next 5 years? What is your capacity to suffer? Everyone here knows if you bleed the foreign company long enough most will give up and go home.
And of course, all this raises the question of whether Uber can be #1 globally but 2nd or 3rd in China?
Watch over the next months for press releases by Didi. New partnerships. New products. New promotions. Etc. The operational fight will play out in press releases over time.
Thanks for reading.