Why the Didi-Uber-China merger is a success for Uber.
Published on August 2, 2016
"If Uber doesn’t succeed in China, then no company from the Valley will”, I always firmly stated.
The CEO of Uber flew to China every other month last year to lead the China strategy; Uber China has raised more than $1 billion from Chinese investors and the team has grown to over 800 members covering 60 cities. For Uber, everything looks wonderful and winning the market appeared simple and straightforward. Seemingly, nothing could go wrong.
However, the news yesterday stated that Uber has been defeated. Uber China has been acquired by Didi Chuxing(“Didi”) in exchange for a 20% stake in Didi, which media coverage interpreted as a failure for Uber.
That is not true. This is indeed a success for Uber — only defined in a different format.
Why?
Because this is the best outcome for Uber and Uber China's shareholders. A 20% stake in the largest Chinese competitor will make Uber’s numbers look great on paper — especially for future IPO documents. More importantly, Uber will stop burning money in China and trust the local counterparts to expand the Chinese market on its behalf. In a year or so, if Uber can’t keep the momentum in China, such a deal and time window would vanish. Do the math. Uber China's market share is only about one tenth of Didi's in China, but it has been exchanged for one fifth of Didi's shares.
Percentage of Total Ride in China DIDI UBER CHINA
2015 Q1 78.3% 10.9%
2015 Q2 77.8% 12.5%
2015 Q3 78.8% 10.4%
2015 Q4 79.0% 8.7%
(Source: CBN Weekly)
Here, I want to share my personal observations as an Uber user in China over the past two years to reflect why I think this merger is a success, and why every company should rethink their China strategy.
Two years ago, I frequently took Uber in Beijing. I loved the product and the marketing campaigns lead by the China team. One day, I booked a ride to the Beijing International airport from home. I was asked by the driver to pay for the fee of 10 RMB in cash in the middle of the ride. I asked the driver why he couldn’t charge and add it in the Uber app; the driver said that such feature doesn’t exist. Fine. Two years later, when I took the same ride via Uber to go the airport again, I was asked to pay 10 RMB in cash again. I asked the driver why Uber couldn’t, but Didi and other local apps could support charging the toll via the app, the driver said because Uber is a foreign company.
It's only one example of how Uber fell behind on the product side, failing to improve small features that would make passenger’s life so much easier. Uber is famous for its illustrious technology in U.S., so I could only guess the reason why such features are not developed elsewhere is that they are not global priorities. At the same time, Didi hired thousands of engineers, working day and night, to improve products quickly to catch up with Uber. Besides efficient toll paying systems, Didi users can order a bus, taxi, pool, a luxury car, or a personal driver to help drive their cars back when they are drunk or for long-commute trips back home during Chinese new year — just to name a few.
This isn’t the Uber team’s fault. They have spent so much effort in China, but it is not as fast as Didi. Sorry. The result is, even a loyal Uber user like me, will prefer to use something more convenient instead of sticking to the brand. When my mom asked me to install a car-ride app for her, I installed Didi instead of Uber because of Uber is too foreign to her and Didi is more user friendly.
Besides the app, another reason that I don’t want my mom using Uber is that Uber drivers (at least in Beijing) always refused to pick the passenger up when they learn that the commute is going to take more than 30 minutes (Do a quick social media search to find out how many people complained). I performed some investigations and found that the drivers are heavily incentivized by a daily subsidy system where they will receive an additional $30 if they complete more than 22 trips every day. Thus, the drivers are more likely to choose shorter commutes, effectively creating an efficient back-and-forth between passengers and drivers. Uber ceased to be the fastest app to get a rider, and that subsidy rule, even as of today, still exists.
During my last trip to Beijing this July, I tried to pick up Uber again and selected “pool for one person”, as I always do in San Francisco. The car arrived and I was shocked. It was one of the worst and crappiest cars I have ever seen in my life. I literally hesitated for 10 seconds before sitting in. The car was very small with two doors and smelled horrible. Worse, the car didn’t even have a plate from Beijing, which meant that most of the time, it would be banned from driving on the main street. That became the last straw for me to use Uber in China, although I am still a happy Uber user in San Francisco.
The numbers I quoted from the media have reflected Uber losing appeal from its users. Starting from 2016, Uber started to subsidize significantly more than Didi, and that's where the company may start to feel the pain. For an average order, Uber pays 10% to 40% more than its competitors to retain drivers and users. The user acquisition cost becomes too high to afford, which directly leads to the merger.
SUBSIDIZE MULTIPLE DIDI UBER CHINA
JULY 2015 2.5 2.3
FEB 2016 1.8 2
JUNE 2016 1.3 1.8
(Subsidize Multiple: for one-dollar passenger paid, how many times drivers get paid; Source: CBN Weekly)
Based on the past track record of Didi’s acquisition of Kuaidi, the brand and operation of Uber will most likely fade away. However, this is a good fight for Uber. Its Chinese entity's valuation increased from 700 million in 2014 to 7 billion in 2015. A great fight, and a great financial success.
I am always a big advocate for Silicon Valley companies to provide the best products in China. However, there are circumstances where foreign companies won’t be able to succeed. Uber is in a situation where the competitors are so strong and customers do expect high-quality services tailored to their own needs. Success, for Uber, means a different thing this time. The product may not work the best, but the numbers makes sense at the end of the day.
Not to be bleak but companies who are planning on China strategy now should reconsider the market and their competition. Most importantly, could the product offer the same level of quality on par with the competitors? If so, I look forward to referring your product to my mom. If not, think about setting up a structure to license your product to a local entity in exchange for 20% stake, raising funds separately in China, joining its board and having the local founders run it like a real startup.
This year, I started a venture fund in U.S. called Hemi Ventures to invest in the frontier tech startups in Silicon Valley. I firmly believe that with U.S. and China prevailing as the two largest and fastest-growing markets in the world, there should be more collaboration and leverage, instead of misunderstanding and mistrust between the two countries. The increasing amount of flights between Beijing and San Francisco reveals the tight connections between a market famous for innovation and a market hungry for innovation. Uber China and Didi's merger connects the two enterprises together, and there will be more. Call it a fight, call it a team — no one company could single out the other. The only things that matter are the determination to learn a fast changing world and the will to never quit.
Thanks, Uber China, for a great fight!