MULTINATIONALS: Uber In China Overdrive With $1 Bln Spending Plan
Bottom line: Uber and rival homegrown Chinese hired car services are likely to ultimately get a green light to operate throughout China, providing a much-needed shot of competition to traditional taxi fleets.
Anyone who thought that US hired car services hotshot Uber might be stalling in China might want to reconsider that view, following new reports that say the company has budgeted a cool $1 billion for its China expansion this year. The reports are all citing an internal company email, which strongly suggests that Uber deliberately leaked the message to quash any talk that it might be losing its resolve to push ahead in a China market that is quite difficult but also has huge profit potential.
At the same time, another report is saying that Uber and other providers of similar hired car services could ultimately find their business model outlawed, as a number of cities consider banning or heavily restricting the use of private cars that compete with traditional taxis. I seriously doubt that will happen, however. That’s because Beijing has shown an usual desire to accommodate these newer, high-tech services that have the potential to drive China’s economy in the future as many traditional industries lose momentum.
According to the leaked internal email, Uber chief Travis Kalanick said China is his top priority this year, and that his company is completing nearly 1 million trips in the market now each day. (English article) The milestone is quite impressive for a company that only launched its China service in February 2014, and has hit quite a bit of resistance from local taxi companies since then.
Kalanick added that Uber plans to boost its China presence more than 5-fold over the next year, with plans to launch in 50 new local cities over the period. It currently operates in just 11 cities in China. But he noted that China was not a market for the timid, and that it has seen fierce competition there. One of its chief rivals has been Didi Kuaidi, a homegrown company that was formed by a recent merger of the country’s 2 largest players and counts local Internet giants Tencent (HKEx: 700) and Alibaba (NYSE: BABA) among its major backers.
Uber has also seen numerous bureaucratic obstacles from city government responding to complaints from traditional taxi operators, which say Uber, Didi Kuaidi and other similar companies are unfairly stealing their business. Those complaints led to raids on Uber’s offices in the cities of Guangzhou and Chengdu around the same time last month, though there were no reports the service was ever shut down. (previous post)
At the same time, another report is pointing out some of the steps that cities are taking that could eventually lead to bans on the kinds of private cars that Uber uses to ferry customers around. The reports point out the interior city of Xi’an has determined the business of using such private cars is illegal, and that Guangzhou is also studying the matter and expected to make a decision soon. (Chinese article)
There are quite a few forces at work here, which is why this case is particularly complex. Quite a few of the factors are working in Uber’s favor, including a consumer embrace of its services that are cheaper and often friendlier and more efficient than many cities’ taxis. At the same time, Beijing and local governments must certainly like the new jobs that a company like Uber can bring by offering more affordable hired car services.
Lastly, Beijing is probably also eager to show a case where a foreign Internet-based company can succeed in China. Despite years of effort and billions of dollars in investment, big global names like Google (Nasdaq: GOOG), Amazon (Nasdaq: AMZN) and Yahoo (Nasdaq: YHOO) have failed to gain any traction in China, and criticism often abounds that Beijing discriminates against these foreign names and favors local players.
The big factor working against Uber and the other newcomers is resistance from the Chinese taxi firms. But in a number of other similar challenges in the financial and media sectors, Beijing has shown an unusual tolerance for these newer and often better-run private companies. That leads me to my guardedly positive prediction that Beijing will take a similarly enlightened stance in the case with Uber, and will quietly pressure city governments across China to let these companies expand and provide some much-needed competition for local taxi operators.
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