Uber Takes it On The Chin In China

Last year, Uber declared its ride hailing service would dominate the Chinese market. It hasn’t turned out that way. For the past year, it has waged open economic warfare with Didi Chuxing, a firm created by two of China’s largest internet companies — Tencent Holdings and Alibaba. Didi and Uber did battle for a year by basically paying customers to use their ride hailing services instead of the other way around.

Uber China deal

It’s as if Ford and Chevy started giving their F 15o’s and Silverados away to truck customers. Ultimately, it made no sense. Scammers were making money by creating false bookings in order to collect the incentives offered by both parties. After Uber threw more than $2 billion into the pot to wrestle customers away from Didi, its investors demanded a halt to the competition.

Didi and Uber have now buried the hatchet. Didi will buy out Uber’s local business to create a new Chinese ride share business valued at $35 billion. Uber will be left with a 20% stake in the new company. Didi will have a 20% stake in Uber China. Both will have representatives on each other’s board of directors.

“The road to China has been littered by corpses of foreign technology companies that have tried to operate here unsuccessfully,” said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia. “This could be viewed as a setback for Uber, but it could have been much worse.”

Doing business in China is a challenge worthy of Sun Tzu and Machiavelli. It’s often as much about who you know as what you know. Last August, Uber suddenly found it had been blocked from WeChat, a popular Chinese messaging service run by Didi backer Tencent. Then Didi recruited allies, forging a four way alliance with ride sharing services that compete with Uber. The alliance include Lyft, and Asian ride share companies Grab and Ola.

In the end, Didi proved too resourceful and too well-connected. Uber threw in the towel just days after China banned the practice of charging less than the cost of a ride, eviscerating Uber’s most powerful means of attacking Didi. Doing business in China is a Byzantine world of intrigue, dark schemes, and naked power — just as it is in every other country on earth.

The government often plays favorites, as it did recently by shutting down Apple’s book and film service in the country after Apple failed to kiss the right rings. It decided to assuage its sins by investing $1 billion in a local, well connected Chinese company named Didi Chuxing. Other major international companies are required to work with local partners in order to gain access to key Chinese markets. Tesla Motors is currently in search of the right partner so it can build manufacturing facilities in China. Sometimes things are more personal. Didi president Jean Liu is a cousin of Uber China senior executive Liu Zhen.

Didi is only four years old, but it has already created a massive business in China. It now handles more than 11 million rides a day and serves about 300 million users across some 400 cities, offering taxis, private cars, ride sharing and test driving. Ride hailing and sharing are ideal for residents of China’s densely populated cities, where owning a car can often be as much a curse as a benefit. The bruising, bare knuckle fight between Didi and Uber may be just a foretaste of things to come in other countries as the idea of private car ownership continues to decline.

Source: Bloomberg

Steve Hanley

Closely following the transition from internal combustion to electricity. Whether it's cars, trucks, ships, or airplanes, sustainability is the key. Please follow me on Google + and Twitter.