On 1 August 2016, Didi Chuxing announced a strategic agreement with Uber. Didi will acquire all assets of “Uber China”, in exchange Uber will receive 5.89% of the combined company with preferred equity interest which is equal to a 17.7% economic interest, others shareholders like Baidu will receive 2.3% economic interest in Didi as CNBC report. There has been a battle between them for the last couple years, and it’s been beneficial for none of them. We’ll see how both companies survived in China before the agreement, and we’ll also try to understand the consequence of this strategic decision from Uber perspective. Did Uber win or lost?
Uber’s battle in China
Being an entrepreneur means you are an explorer by nature, doing what everyone thinks is impossible but with an optimistic perspective on the unknown. -Travis Kalanick Uber CEO
Uber has lost a fortune in China trying to be the leader. They lost more than 1 billion dollars in 2015 and at least 1.2 billion in the first half of 2016. Still, they couldn’t beat Didi which owns 80% of China’s market.
Indeed Uber has been subsidizing the driver, they paid it much more than what they earned, sometimes paying a driver 110% to 130% more than the fare paid by the customer. Subsidizing is harmful, not only because it drains cash but also because it doesn’t represent the reality of supply and demand. When Uber is paying way over what is the regular rate, it attracts shares of the market that wouldn’t be there without these subsidies. Which mean that as soon as they stop subsidizing, a share of the market will be lost. So what they are doing is just renting a part of the market.
Uber couldn’t afford to lose more money, and the investors were not for subsidizing anymore. The two firms lost billions in this battle; Uber lost 250 millions last month, which gives it no choice but to succumb.
Why Uber couldn’t beat Didi?
Travis Kalanick knew that it would be difficult enter the Chinese market. China’s infrastructure make it difficult for western companies to succeed over there. In fact, the government always impede foreign firms to enter the Chinese market. Amazon, Google, Facebook and other U.S. technology company have struggled to make their way into China to finally fail.
Actually, You can find a Chinese equivalent of Amazon, Google, Ebay and many other U.S. firms. Still, Kalanick decided to take its chance in China and Uber was no exception. The core of the app wasn’t designed to meet China’s market requirements. Uber was using Google map to locate and needed customers to confirm their credit card which was a huge obstacle for many Chinese users. In China Google Maps isn’t running as well as in western countries, its coverage in China is extremely limited and inaccurate. Uber had to partner with Baidu and Alipay which are Chinese companies.
Chinese are very different from western; Uber took some time to understand that and while it improved its app, they still couldn’t attract more customers. Now, why Uber couldn’t beat Didi? In fact, we can say that they both win in China. The only obstacle to Uber in China wasn’t Didi but the state. Foreign companies like Uber are subject to even more regulation than their Chinese competitor.
Silicon Valley in China
Uber get the advantage in China over other competitors like Google, Amazon. Most Silicon Valley tech giants, from Facebook and Google to Amazon, have met with failure in China, reasons are government regulations, or it might be their “arrogance”. Anyway even if “UberChina” didn’t succeed alone, Uber is still present in China through its partnership with Didi, and they can now profit from the growing ride-hailing market without spending billions into subsidies.
Exit China market
This deal allows Uber to exit the market and stop the heavy losses. Moreover, Uber can now focus on another region like India which represents a substantial share of the market with other competitors. This deal will also let them improve their other “Uber services” like UberEats.
Finally, this deal was a clever move from Uber. It gained a position in China while other U.S. tech firms have failed. They stopped the losses and can now focus on other strategic decision. Without this deal, Uber would not have continued in China since the regulation was about to forbid subsidies.
What stopped Uber to become fully successful in China is not Didi but impending national regulations. We can still call it a success for Uber.