GUEST POST: How to Save Uber China

Bottom line: Uber should consider forming closer alliances with local city governments to boost its chances of survival in China.

By Jeffrey Towson

Hired car services giant Uber is now in the situation you never want to be in in China: a foreign company on the wrong side of both the government and powerful local competitors. Ask Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO) how that worked out. However, Uber can still win in China. They have one last move that could reverse the situation. They can do what homegrown rivals Kuaidi and Didi won’t. They can ignore the advice of Alibaba (NYSE: BABA) Chairman Jack Ma and marry the government.

Ma has famously said “Never, ever do business with government. Love them. Don’t marry them. So, we never do projects for government.” Compare this to statements by Kuaidi’s CEO Joe Lee, who said “One thing we learned is if we want to grow fast, we need to make sure the government supports us. Because in China, they can stop you in one day — they shut down your server and you’re out.”

Kuaidi and former rival Didi, which merged earlier this year, have succeeded in China by taking both bits of advice. They have effectively coordinated with the government to avoid confrontation and to get access to state assets, namely taxis. That is what got their taxi hailing services to more than 350 cities, with a reported 6 million riders per day. But, per Jack Ma, they have also been unwilling to partner or merge with local governments or state-owned taxi operators. So they are dating the government but they won’t marry.

Some examples of their “date but don’t marry” approach:

— Prior to launch, they coordinated with the government and state-owned taxi companies about their planned transportation services.

— Upon launch, they ignored ride sharing and focused on free taxi hailing. Instead of competing with taxis, they helped drivers make more money.

— In Shanghai, they even integrated their hailing services into the operations of the four major state-owned taxi companies.

Date-but-don’t-marry is a common strategy in highly political Chinese industries. You can see it in the banking, insurance, telecommunications, and energy industries in particular. And these strategies can be exceptionally profitable. And that is the opening for Uber. As they can no longer beat the merged Didi Kuaidi in the market, they should do the government deals their competitors won’t.

They should partner with local governments and local state-owned taxi companies. Through joint ventures or technical agreements, they can help them develop their own taxi hailing apps. They can help the state-owned companies compete directly with Didi Kuaidi, and even trump Didi Kuaidi’s network economics with their own local government monopolies and technical partners.

This is actually a large opportunity. While big cities like Suzhou and Shanghai may have some ability to build their own taxi hailing and eventual ride-sharing platforms, this is an anomaly. Other smaller cities have no ability to do this.

One approach for Uber would be to do a series of joint ventures or technical agreements in a single geographic region, such as Yunnan and Sichuan provinces. Uber could lock up the major local cities, get to scale in that region through taxi hailing, and position themselves for private ride sharing that is still not allowed but will offer the next big opportunity.

In my research, I focus on the intersection of competitive advantage and state capitalism. I call Uber’s particular situation “Giants, Dwarves and the State”. When a market is politicized but also offers strong competitive advantages, three types of players usually end up emerging: Giants, who dominate the market; Dwarves, who struggle on the fringes and the State, which is deeply involved and sometimes a competitor.

So if you can’t be a giant, your best move is usually to exit or hook up with the state. But you don’t want to be a dwarf. That is basically Uber’s situation and choice today.

Jeffrey Towson is a private equity investor, professor, and author based in New York and Beijing. He researches Chinese consumers and competition, is author of the One Hour China Consumer Book, and invests in US-Asia healthcare and consumer product deals. He is reachable at jeffreytowson@gmail.com.