GUEST POST: Uber’s U-turn in China: The Real Lesson
By Kitty Fok Managing Director, IDC China
Much of the conventional wisdom and press commentary about Uber’s recent decision to sell its China business to Chinese rival Didi portrayed the move not just as a defeat for Uber, but a broader setback for all American tech companies in China.
The New York Times described the development as “a stark signal of how difficult it is for American technology companies to thrive in China,” while the Financial Times wrote that Uber had become “the latest in a succession of US Internet companies that have tried to conquer the China market, and walked away with much less than they had hoped for.”
But the argument that the Uber-Didi deal simply shows that the China market is stacked against Western tech companies misses a broader point.
Beyond alarming headlines like “How Uber Crashed,” a rather different reality emerges. Didi offered more and much better features based on their deeper knowledge of the Chinese market compared to Uber, who despite spending over $1 billion to prop up its position in the country, was left far behind.
Uber simply could not compete with a better product for Chinese customers, as any close comparison of the services between the two companies makes clear. In China, 3 kinds of Uber cars were available – cheap, medium, and expensive. That was it.
Didi provided the same thing, but it also offered a host of other features like taxi-hailing. Didi also offered bus-hailing, and a carpool service — something of increasing value in China’s traffic-congested urban areas. It was also possible to use the Didi app to arrange for someone to drive ones’ own car home after an evening of drinking — in effect, hiring a designated driver. These additional services were much more attuned to the dynamics of Chinese society and the needs of Chinese consumers.
Left Behind
Uber reportedly spent over $1 billion to counter Didi, offering substantial subsidies to drivers and cash rebates to consumers. But Uber remained far behind its rival. When the deal was announced, it was operating in just 60 Chinese cities, while Didi had 80 percent market share while operating in over 400 cities.
It must have become clear to Uber’s top management that overtaking Didi in China was a losing cause. Indeed, there were reports that key Uber investors were pushing the company to cut its China losses, which were seen as an obstacle to plans for an IPO. So, on the principle that “if you can’t beat them, join them,” Uber simply sold its China business to Didi.
The upshot is that Uber now has a $7 billion dollar stake share in a dynamically growing business. That’s actually not a bad result for the estimated $2 billion Uber spent in China.
The moral of this story is not, as some headlines screamed, “Uber Forced Out of China,” but rather that everything in China is more complicated and less ‘black and white’ as it often appears to be the case. One can argue that under the circumstances, Uber’s decision to sell is better understood not as a defeat but a strategic retreat.
What international companies doing business in the PRC should take away from the Uber-Didi deal is not a sense of despair or hopelessness, but rather an appreciation of the need to better understand and adapt to a rapidly changing and increasingly sophisticated market where strategies that may have worked in other settings do not necessarily apply.
In particular, it should prompt a re-examination of how to think about localization, a central ingredient in many corporate strategies in China. Usually, the discussion centers on using the local language and making products cheaper and more affordable for Chinese consumers. But the definition is changing, and will increasingly require creating more localized features that reflect the scope, complexity, and sophistication of the market.
To reach their goals to create a more digital society, the Chinese are still going to want and need the involvement of international tech companies. Western firms who understand this, and can tailor their activities to take account of local conditions, will find there are still major opportunities in China.
Kitty Fok is managing director for IDC China. You can follow her on LinkedIn at https://www.linkedin.com/in/kittyfok, and on Twitter at @kittyfok. To read the original commentary, click here.
