China has been the crematorium for American mega-companies. It does not come as a surprise when you hear that an exceptionally successful international brand fails to plant its roots in China. Most companies enter China with big ambitions, but dominating the Chinese economy holds equivalence to Russian Roulette. Even though there is a possibility that you might win, the ultimate probability is negative infinity: things eventually go downhill for most international companies that enter China.
One such company, which failed to conquer the Chinese market, was Uber. The Chinese have mastered the art of replication. Most companies often ignore this fact when they enter the “ideal market” with a middle class twice as large as the US. The company’s strategy usually focuses on their business model, as it should be. However, in China, expanding companies often ignore the threat of their law, which is highly ambiguous and selectively enforced. Once the company enters the Chinese market, new domestic competition may appear out of nowhere.
Before the arrival of Uber, the failure of American titans was not unprecedented. Companies like Google, Amazon, Mattel and Home Depot were chased out of China due to stiff competition. Nevertheless, Uber thought that it was different. Being negligent of the failures of internationally successful companies, Uber set out on its ambitious road to conquer the streets of China. Uber was confident in its skills to persevere, which had been distinctly demonstrated in the battles it had to fight in the US.
The business model presented by Uber was deemed to be legally ambiguous, but the company was still given the thumbs up to enter into Chinese markets. This falsely bolstered the company’s confidence, which started taking China as one of the many obstacles it is familiar with.
Furthermore, Uber didn’t make the classic mistake of directing the expansion from conference rooms in San Francisco. It tried really hard to build the Chinese branch of the company but failed to establish Uber in China.
Uber’s CEO, Kalanick, very categorically described China as Uber’s number one priority. Kalanick’s devotion to building his empire in China was also unprecedented. He was so serious about the expansion that he spent 70 days of 2015 in the country. The amount of time he spent in China accounted for nearly 1/5th of the entire year. The fact that he joked about acquiring Chinese citizenship attests to the fact he spent significant time in China.
Uber even entered the metaphorical Chinese Shark Tank and partnered with local investors like the Chinese tech giant Baidu, and launched in 2013 in the country’s largest city, Shanghai. Initially, things were difficult.
Furthermore, the integration of its US model made things even more rocky for Uber. It launched with only US credit card support, making sure the vast majority of locals, whoc use WeChat and AliPay, were unable to book rides. The app also used Google Maps, which has a reputation of being notoriously bad in China.
Bottom line, the biggest problem for Uber was its entire business model.
The company doesn’t own its cars or hire its employees, meaning its only value is connecting people who want to drive to nearby people to want to ride. But because drivers and riders are regional, entering a new city is like starting from scratch.
Uber may have a monopoly in LA, but that won’t mean anything when it expands to Seattle.
The good thing is that once it has a critical number of both drivers and riders in a particular city, they’re very likely to stick with Uber. It only takes 2.7 rides, according to the company, before someone becomes a permanent customer. Uber’s strategy, therefore, was to grow with lightning speed.
Every major city had its own general manager, who would tempt new drivers with bonuses and new customers with free rides. Becoming a driver was easy, no long background checks or complicated forms required. This worked pretty well.
When it was first. The problem was that, in China, it wasn’t. It’s a Chinese competitor — Didi — was founded in 2012 and had everything Uber needed: immense scale, a China-first design, and the support of the government. While Uber operated by disrupting the taxi monopoly in each new city it entered, Didi was much more old fashioned — it merely connected riders to existing licensed taxi drivers. So instead of inciting chaos and even violence like Uber, Didi was on the good side of authorities — even helping manage over 1,300 traffic lights in partnership with city governments. In 2015, Didi merged with its closest competitor, giving it near-monopoly control of the market. It became the only company in the world backed by all three of China’s tech giants: Baidu, Alibaba, and Tencent.
Apple and China’s sovereign wealth fund also invested around that time. Uber was behind on day 1. If a Chinese user already had Didi, the only reason they’d switch is if it was that much cheaper. To catch up, Uber had to dump insane amounts of money. And, that’s exactly what it did. Uber spent a jaw-dropping $40–50 million US dollars per week on free rides and bonuses in China. It lost, in total, $1 billion every year.
With Didi, it played a massive game of chicken — spending this much money was unsustainable, but who would give up first? This metaphorical arms race also created a kind-of cold war dynamic. Didi allegedly sent undercover engineers to be hired by Uber, where they would collect trade secrets and even conduct sabotage. On occasion, Uber would be blocked from WeChat.
In China, this was the equivalent of Google hiding a competitor from its search results — making it effectively invisible to the vast majority of the country. And besides burning through cash like it was fuel, this subsidy-war also led to an unintended side-effect: fraud.
In one Chinese city, Uber reported having as many drivers as London, Paris, and San Francisco combined.
But how many of them were real? When a “new” user was offered a free promotional Uber ride, the company still paid the driver as normal. This created a loophole. Two users, one acting as the “driver”, and the other as the “rider” could collude, taking a fake ride, and splitting the profit. Soon, scammers created entire circuit boards with rows of SIM card slots, each simulating a fake phone. They would take a fake ride, swap out SIM cards, and repeat. In one Chinese city, fraud accounted for an estimated half of all rides. Over 30,000 fake rides were taken every day in the summer of 2015, just in China. Uber fought back by creating a database of IMEI numbers, which are unique to a given phone and thus allowed the company to identify a scammer even after they had reset their phone.
However, Apple hid this number from developers starting in 2012 for its users’ privacy, preventing Uber from detecting fraud. Uber was undeterred and hired a 3rd party hacking company to bypass iOS’ security rules, which, Apple discovered, warning them to stop.
In its typical fashion, Uber continued anyway, adding a line of code to check if the app was running in Cupertino, California, where Apple is headquartered, and if so, not break its rules.
Apple still found out and called a very angry meeting. Things were not going well for Uber. It faced massive fraud, trouble with Apple, and over $1 billion a year in losses.
Then came the final nail in the coffin. For its first few years in China, Uber operated in a legal grey area. Like in the U.S., this subjected it to varying levels of retribution based on the mood of each municipal government.
In the Southern city of Guangzhou, police raided the Uber office at midnight, accusing it of running an illegal business.
In Hangzhou, another police raid was followed by a violent confrontation between Uber and taxi drivers. All this changed in July 2016, after a series of high-profile crimes committed by Didi drivers. China legalized the industry, which came with strict new regulations like there could be no subsidies and drivers required 3-years of experience.
From now on, Uber would need to request formal approval from the local and national governments before expanding to each new city. At the beginning of that year, Uber operated in 37 Chinese cities to Didi’s 400 and had 229 million daily active users compared with 908. Just a few short years after it had sprinted into the country with supreme confidence, it had all finally become too much. Just days after the new regulations were passed, Uber China was sold to Didi. Uber took a 19% stake in Didi, and the leaders of both received positions on each other’s board of directors. Whether this was an embarrassing failure or a diligent strategic decision is still open for debate. On one hand, Uber unequivocally did not achieve its original goals of conquering the Chinese market. It left with only a minuscule market share and incredible losses. It did not succeed where others had failed in China, and even though government protectionism may be somewhat to blame, Uber certainly made many unforced errors along the way.
On the other hand, Uber spent $2 billion on China and left with assets valued at seven billion dollars. Viewed purely from the balance sheet, China was, unlike most of the company’s markets, a source of pure profit. It could now invest that money in other, more win-able markets in Southeast Asia and elsewhere. So, a failure, yes. But, also, a profitable one.