When Beijing, some months back, announced new regulations to legalize app-based ride-hailing services in China, Uber Technologies Inc. hailed that move as a “historic starting point.”
Indeed, the removal of regulatory uncertainty seemed to set the stage for Uber for an expansion in China that could boost that San Francisco-based firm’s existing $62.5-billion valuation sky-high. No surprise, then, that Uber chief executive Travis Kalanick told theFinancial Times that China was “the number-one priority for Uber's global team."
The ride-sharing giant even announced new services aimed at differentiating its Chinese offering, including boat rides, hot air balloon rides and even a puppy-delivery day, where the company would bring a cute canine to offices for a 15-minute play date.
The new rules in China, announced earlier this summer and intended to take effect later in the year, seemed to set the stage for a David vs. Goliath battle between Uber and Didi Chuxing -- the Chinese transportation company, which dominates more than 80 percent of the market and has backing from Apple, plus a partnership with Uber's biggest U.S. rival, Lyft.
But, then, shockwaves erupted: Within a week of China's announcement, Uber merged its Chinese operations with Didi, bowing out of the battle altogether, in return for a 20 percent stake in the combined company. The deal valued the combined firm at $35 billion, according to Bloomberg, bringing together Didi’s $28 billion valuation with a $7 billion valuation for Uber China, which will continue to operate as a separate brand.
So, what were, and are, the lessons for other companies seeking to build businesses in China? Here are three.
1. Don’t go it alone.
Some have said Uber's deal is a bad one. These naysayers include Tech in Asia’s Charles Custer, who rightly pointed out that Uber could have invested $15 million for a 20 percent stake in Didi in 2013, back when that Chinese concern was valued at $60 million.
Instead, Uber plowed billions into building a failed Chinese operation. Still, it got a lot more right than most internet companies that have previously tried to enter China, such as Microsoft, Google and Facebook, which all tried to go it alone and failed. Instead, Uber learned from LinkedIn. LinkedIn was probably the first U.S. company to succeed in penetrating China, generating great success by ceding control and joining hands with a number of local strategic partners.
Those partners included Chinese internet giant Baidu, which gave LinkedIn access to its mapping and search services, and China Broadband Capital (which also invested in LinkedIn China). Since China is a much more relationship-driven market than the West's rule-of-law-based jurisdictions, finding good partners is absolutely essential.
2. Understand authority.
The U.S. and Chinese cultures differ in their attitude toward authority. The United States was founded by rebels breaking free from their rulers and creating a culture that values adventurers who push the limits of what is acceptable.
By contrast, China’s culture is based on Confucianism, which values filial piety and deference to authority. Government in China has a much stronger hand in the affairs of businesses and can help companies scale, or conversely, shut them down. Uber has a prototypical American culture, led by a chief executive with the self-styled image of a cowboy who shoots first and asks questions later. Uber’s modus operandi is gaining market dominance before dealing with regulatory issues.
Robert Salomon of NYU Stern School of Business has said that Uber should have asked authorities in China for permission, thereby showing respect and understanding of the cultural differences involved. The reality is even more complicated: Chinese companies have operated in gray zones with implicit approval from the Communist Party for years.
What matters is bringing advisors on board who can help navigate the closed-door sessions that characterize the Chinese Communist Party. Uber did this by partnering with numerous state-owned enterprises, including CITIC Securities Co Ltd.
3. Check your model.
Everyone knows that doing business in China is difficult for outsiders, but few entrepreneurs think about how their own business models might raise even more barriers. Tech companies focused on pure software, for example, can cross borders more easily than those like Uber that incorporate physical assets, such as cars, logistics and local payments, not to mention the regulatory headaches disrupted taxi drivers may cause.
Businesses like Uber can still win in overseas markets, but they require incredible commitment. As one example, Amazon deals with physical assets, logistics, local payments and regulatory issues but is quickly gaining ground in India. However, China probably presents an order of magnitude more difficult to penetrate than India's; and Amazon is an order of magnitude larger than Uber. As Anthony Tan, chief exec of Southeast Asian ride-sharing service Grab, told CNBC of ride-hailing apps, "There is a clear advantage of being local."
The story is far from over. Uber’s problems in Asia may not end with its deal with Didi. News that Grab is raising $600 million from Didi and other investors suggests that while the anti-Uber alliance is still intact, we can expect more consolidation in the space.
Interestingly, Uber’s Chinese merger is actually evocative of the sale, in 2005, of Yahoo! Inc.’s business in China to Alibaba, along with its $1 billion investment there. While the deal was initially seen as a failure, it turned out to be one of the best assets Yahoo! owns.
Similarly, Uber will save the $1 billion it was annually plowing into building its China business, so it can now shore up its finances for a potential IPO. Essentially, Uber can now effectively ride Didi’s coattails to a growing valuation for its one-fifth ownership of a company that looks set to dominate ride-sharing in China for years to come.