In recent news, Uber announced that it will be selling all of its businesses in China to ride-hailing rival Didi Chuxing, capitulating to Didi to end a fierce subsidy battle in China’s ride-hailing market.
Beijing was Uber’s 100th city to launch in globally, and the city with the fastest growth at the time. Uber, the Economist noted, poured over $2 billion into its Chinese operation, yet never secured more than 20% of the market. For years the company had lagged behind Didi, which has an 80% share of the Chinese ride-hailing market.
On August 1st, Uber finally relented and agreed to hand over its Chinese operations to Didi, in return for a 17.7% stake in the combined company’s equity. The company, though, will receive only 5.9% of the voting rights in the new entity. Investors in Uber China, including Baidu, will receive a 2.3% stake. Although additional financial and operational details are still emerging, the sale of Uber China to Didi is a clear indication that the former had relinquished its ambition to conquer the Chinese ride-sharing market.
Where did Uber fail?
Firstly, protectionism is widely prevalent in China, even if not prominently displayed. Doing business in China as a foreign company faces large hurdles, in part because the Chinese government makes it extremely difficult for foreign companies. China demands tech companies submit to Chinese regulations on censorship, and this has led to many controversies over the decades.
Critics also contend that Uber was both late to the market, and its business strategy was simply not adaptable to China’s culture. Uber first worked with Google maps, which does not work well in China, before switching to a local service. Another inherent problem was that it offered a credit-card-based payment system,one that is not widely used in the mainland. Most locals prefer to transact via WeChat instead, a hugely popular messaging app. But WeChat (whose owner, Tencent, is an investor in Didi), sometimes blocked Uber, consequently wounding its business.
Didi, however, had a firm grip on the local market. From working with taxi drivers rather than individual car owners, this move immediately won over local authorities and pleased taxi drivers. Additionally, Chinese riders tend to trust taxi drivers more than strangers who happened to own a car. In time, Didi added car-pooling and bus-hailing services, much to the delight of Chinese users.
Eventually, three China trends – urbanization, growing consumer sophistication and the mobile-internet revolution – were crucial to Didi’s success. Its superior understanding and adaptation of local culture, including forming a strategic partnership with WeChat, the dominant messaging service in China, to handles payments for credit card-shy Chinese, sealed the deal for its dominance in the ride-hailing industry.
What’s next for Uber?
With China settled, Uber can turn to other countries where it’s fighting for market share, such as Grab in Southeast Asia, Ola in India and Lyft Inc. in the U.S.
By shedding its massive losses in China, the move could also help Uber clear the path for an eventual initial public offering. The Wall Street Journal indicates that Uber plans to launch an IPO at some point within the next 18 months.
Uber can also focus its effort on developing some of its other products such as UberEats, the food delivery business. A report in the Financial Times said that the company is planning to invest $500 million into building its own mapping system.
Source: Bloomberg, Economist, WSJ