Uber’s China Adventure Has 4 Lessons for Tesla (Tech Strategy – Daily Article)

Posted on August 2, 2022 by Prof Jeff

Uber’s sale of its China business to local rival Didi Chuxing in 2016 is often referred to as a surrender. But I think the numbers speak for themselves.

Uber invested 18 months and about $2 billion in China.
Uber walked away with 17% of Didi Chuxing, 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.

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 financial success. It wasn’t the dream of the China market. But you don’t always get the gold medal. A silver can also be great.

And this story provides some good lessons for other Silicon Valley companies thinking about entering China. Especially Tesla, which is betting big on the China market.

Lesson 1: Digital China is Hyper Competitive. It Is Also Very Innovative.

This is not 2005-2010, when Chinese Internet companies were pale imitations of Western companies. China’s Internet companies today are very fast and sophisticated. And the mobile market, in particular, is both advanced and massive (+1B users). Mobile services and apps are generally more advanced than those found in the West (at least in B2C). Today, it is WhatsApp that is a pale imitation of WeChat.

And the business ecosystem in which these companies are funded and launched is also well-developed. There is a big domestic market. And China now has a big population of serial entrepreneurs and seasoned venture capitalists. Everyone talks about the Uber-Didi money war but look at the rapid-fire pace of Didi’s operations and new service launches (car test driving, WeChat tie-ins, O2O offerings, etc.). In just four years, Didi Chuxing grew from nothing to 4,000 employees operating in over 300 cities (compared with Uber’s 200 China employees).

China’s mobile companies are aggressive, fast and very well-run. Didi consistently outran Uber in operations and fundraising.

This is a big problem for Tesla in China. The competitors that have emerged (BYD, Bio, Xpeng, TuSimple, SAIC) are very aggressive and very well-funded. This is not an attractive secondary market for them. They will live and die by winning in China.

This is going to be a brutal fight for Tesla. And it is going to go on for a long time. If you’re an investor, don’t count on any operating profits out of China for a long time. It may happen, but I suspect it won’t.

Lesson 2: First Mover (Plus Scale and/or Network Effects) Really Matters in Digital China

First mover advantage is still a major factor in who wins in China. It is a very fast market. Tens, if not hundreds, of competitors can emerge in months. So being first is very important in general.

But it is especially important when the business is can achieve economies of scale and/or network effects. This tends to create money wars by the early movers. Everyone knows whoever gets to scale first will win. So tons of money goes into the first phase.

Uber entered China fairly late. By the time they began to ramp up China operations in late 2014, Didi and Kuaidi were already offering taxi hailing in hundreds of cities. They already had tens of thousands of drivers and millions of riders. And that kind of early mover advantage does seriously decrease costs and waiting times for rides. A platform business with a big lead in usage can be almost impossible to overcome.

I actually think Uber did surprisingly well given such a late entry. Back in early 2015, virtually nobody thought Uber had a chance in China. And yet they dramatically ramped up their efforts (and spending) and fought their way to a solid second place. That was impressive.

Unfortunately, Didi and Kuaidi merged and never made any mistakes. Uber was never able to overcome Didi’s first mover advantage and growing advantages.

This is an important lesson for Tesla. They did get to the market early. But there are lots of other competitors and they are spending wildly to get users. It’s a full on money war. If you buy a Nio, you get a long list of free services – such as free charging (for life), a personal assistant for 2 hours per day (3x per week) and lots of other services. It’s pretty crazy.

So Tesla is there early. But they are going to have to survive the money war and keep their lead in scale. And it’s unclear if they can achieve network effects. Transportation data is politically sensitive in China. Tesla, like Apple, may end up mostly as a hardware maker in China. And not an ecosystem. That means it’s about economies of scale and share of the consumer mind. Not network effects.

Lesson 3: Be Prepared for “Last Man Standing”. Play to Win Like Travis.

Foreigners keep getting beaten in China by this tactic. In “last man standing”, companies raise tons of money and then build massive capacity (factories, steel mills, driver populations, etc.). The result is that you get a big oversupply and everyone starts losing money. It becomes a contest for who can and is willing to bleed the most cash. This can go on for years – and sometimes decades.

Eventually, the “last man standing” is the one left when all the others have run out of cash or willpower. The company left standing then gets the market. You can see this scenario in lots of Chinese industries, such as manufacturing, solar and even online travel. Note: Expedia finally gave up on China after losing money for 10 years in a “last man standing” situation.

This is the situation Uber was facing in China. And they did well in this regard. When Uber CEO Travis Kalanick came to China, he made it very clear they were playing to win. They were going all in. And it wasn’t just talk. Uber began spending big in China and began raising billions of USD for a long fight.

That was good strategy. Domestic companies always try to make foreign companies bleed cash. So they give up and go home. You need to do what Travis did, which is to show everyone you cannot be scared off. Which Uber did successfully.

Uber China secured a solid second place market position. But they were still bleeding $1B per year against Didi. And this situation could have gone on for years and years and years. This money war is what convinced Didi to merge. They couldn’t scare off Uber with losses so they merged. That’s how Uber got 17% of Didi.

“Last man standing” is common and tends to work well against foreigners, as they frequently give up and go back to their home markets. Chinese companies, in contrast, usually have no place to retreat to. This situation is more difficult for companies funded by venture capital whereas strategic players tend to be able to bleed longer.

This is something Tesla should seriously consider when thinking about China. Are they ready to play “last man standing” and lose cash for 10 years? That is pretty common.

Lesson 4: A Merger Is the Most Likely Outcome in China Transportation

Overall, I think Uber did very well in China. They definitely surprised everyone by going from a written off China business to a solid second-place in the market. That eventually could merge with Didi from a position of strength. And CEO Travis Kalanick’s determination definitely surprised Didi and everyone else in China.

The result was Uber went from a lost cause in early 2015 to a 17% owner of the dominant company in the world’s largest on-demand transportation market. That’s a good outcome, impressive and a big profit on invested time and money ($2B cash for $7B of equity).

And this was always going to be the outcome. Transportation data is politically sensitive. It is why Didi is delisting from the US stock exchange. And data sharing is just the beginning. Transportation will become increasingly digitized and interconnected. There are going to be robotaxis, smart infrastructure, smart cities and so on. Foreign companies are going to find much of the software can only be done by domestic companies. It was good Uber merged with Didi and became a minority (and silent) partner.

I suspect something similar will happen with Tesla. They were the first foreign car company to not be required to have a joint venture in China. That was because of the strategic importance of bringing electric and autonomous capabilities into the country. But that political leverage will decrease over time. And as cars increasingly become software companies and part of connected digital infrastructure, it will be untenable for Tesla to stay a stand-alone foreign company.

In China, I think Tesla will eventually end up as a joint venture or part of a consortium. Their goal should be to be in as strong as position as possible when that happens.

Thanks for reading, jeff

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Jeffrey Towson 陶迅

Consultant and keynote speaker on digital and AI strategy, transformation and disruption

Uber’s China Adventure Has 4 Lessons for Tesla (Tech Strategy – Daily Article)

Lesson 1: Digital China is Hyper Competitive. It Is Also Very Innovative.

Lesson 2: First Mover (Plus Scale and/or Network Effects) Really Matters in Digital China

Lesson 3: Be Prepared for “Last Man Standing”. Play to Win Like Travis.

Lesson 4: A Merger Is the Most Likely Outcome in China Transportation