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Uber China Faces a Massive Challenge in the China Market

by Claire van den Heever

July 12, 2016

How will Uber China make its way in a environment that is as challenging, competitive and regulated as China’s car-hailing business?

Doing business in China has never been easy for foreign-owned companies, but firms in the technology sector have always faced unique challenges. US internet giants Google, Facebook and Twitter were destined for the foreign tech company graveyard long before US-owned ride-hailing app Uber set up its China operations in late 2013 in expat-friendly Shanghai. And, in the wake of Beijing’s concerns over internet sovereignty, foreign companies across industries are worrying that China’s hospitality as a business environment may be in short supply.

Uber China App Screenshot

Uber has largely managed to avoid conflict, partly because it operates as a separate Chinese subsidiary on the mainland: Uber China or 优步 (YouBu). But no one expected that the US-owned transportation network company’s success in the Chinese market would come easily. On April 15, Uber was confronted head-on with a strike staged by a number of its drivers over a reduction in the subsidies the company pays to supplement contractors’ income. Although the number of striking Uber drivers remains unconfirmed, the frustrating effects were felt by would-be taxi passengers across the city as drivers working for Uber’s fiercest local competitor, Didi Chuxing (known simply as Didi), staged their own strike that same day.

A reduction in the subsidies that both companies pay was inevitable: subsidies were intended as bonuses of a kind, introduced in order to attract and retain drivers, and were never part of either of the riding-sharing apps’ business models. Using venture capital to gain clients or users—or “to scale a business”—as quickly as possible (and worry about profits later) has become an increasingly popular model for start-ups from Silicon Valley to Shanghai. But the deliberate lack of attention that is paid to profits in the short term is often accompanied by a lack of concern for a business model’s sustainability. Drivers have come to expect subsidies and both Uber and Didi are now dealing with the repercussions.

“The subsidies have been falling for months, and now the app has even started to charge us around 20% of the money from passengers as intermediary fees,” a driver working for Didi told CCTV. “Many drivers have seen their income shrink to just a quarter of last year’s. Now we are locked in the car loans and have to keep on working for the app without any bargaining chip,” he explained.

Many of Uber’s challenges are not unique to the Middle Kingdom. On April 7, approximately 200 drivers stormed Uber’s South African headquarters in Cape Town, local press reported, after the company reduced fares from ZAR 7.00 per kilometer (approximately RMB 3.10), to ZAR 6.00. Unlike in China, South Africa’s Uber drivers have not come to expect subsidies. Their recent financial strain comes from the fact that a large proportion don’t own vehicles that are new enough to meet Uber’s requirements, forcing them to sub-contract with companies that own a fleet of vehicles in exchange for as much as half of their earnings.

In China, Uber’s car-owning drivers are in the majority, and paying off vehicles over time is more common than simply renting them. The company told Quartz that over 80% of Uber China drivers that had been surveyed only worked for the ride-hailing app part-time. More than half held college degrees and, in the capital, 5% had a Master’s degree or higher. Some are at the center of a new phenomenon, whereby China’s lonely upper-middle class use Uber more as a social platform for making friends than as a source of income. They are well-educated Chinese who drive high-end vehicles, for whom the RMB 3,000 (approximately $469) they earn a month from driving for a couple of hours a day may represent just a tenth of their salaries as sales managers or IT consultants. The fact that Uber is not yet considered legal doesn’t deter them.

Disruption is central to many a tech start-up’s ethos and, for Uber, shaking up the market went hand in hand with transforming the taxi industry. But, until April 15, Uber China had managed to keep the peace, avoiding all but a few minor altercations, partnering with licensed car rentals to prevent legal disputes. People’s Uber—its non-profit ridesharing program that matches car owners with would-be riders who cover basic costs like gas—has also gone a long way towards bringing on-demand transport to the people, so to speak.

“There are a lot of grey areas,” Uber China’s head of strategy and government relations, Liu Zhen, told FT Weekend Magazine on the subject of regulatory issues. “I wouldn’t say that it [ridesharing] is not legal, it is in the process of being legalised.”

Nobody yet knows what Beijing’s next set of regulations on ride-sharing will mean for the future of companies like Uber and Didi. The ministry of transport’s October release of a draft of the new regulations painted a bleak picture for ride-sharing, with an outright ban on the horizon. Since then, experts have suggested that there is hope. “There’s a lot of will to support innovation,” said Shanghai-based economist, Liu Yuanju. “There are parts of the government that definitely want to embrace this [the sharing economy] but they also face a lot of pressure.”

But even if new regulations remove ride-sharing companies from this “grey area”, the government’s attitude to a foreign company like Uber—whose Chinese subsidiary is still majority US-owed—is central to its survival.

James Hu, founder of Jobscan  and co-founder of Wodache (literally “I call a car”), one of China’s first car-pooling mobile applications, believes that regulatory concerns will be Uber’s biggest challenge in the Chinese market. “Relationships with the government are key. What are the incentives for the government to keep Uber around? That’s a question worth thinking about.”

The fact that Chinese internet giant Baidu led Uber China’s second series of venture capital funding would, many imagine, offer the company a certain degree of protection. An almost $2 billion in funding came from Chinese investors after Uber China’s  $7 billion valuation,  Uber CEO Travis Kalanick told reporters in Beijing on January 11. Baidu was joined by high-level Chinese investors including China Minsheng Bank and CITIC Securities. The funding will be used to help fuel Uber’s expansion into 100 cities on the mainland over the course of the year. But focusing only on the country’s evolving business environment for foreign tech companies would be ignoring the elephant in the room. Uber China is head to head with a formidable competitor who isn’t going to give up on the world’s largest market for ride-hailing without a battle.

Beijing-based consultancy firm, Analysys International, chalked up 83.2% of China’s private-car ride-hailing market to Didi and 16.2% to Uber China in an October 2015 report.

“Didi Chuxing is more than 10 times the size of Uber throughout China. There is a clear density and network advantage. Continuing to compete on a broad scale with a well-funded competitor while also launching new products is a significant challenge,” says Jixun Foo, Managing Partner at GGV Capital, Shanghai. “Uber may need to choose what it wants to do well. For example, Uber may want to focus on higher end users, or on its origin which is more ‘black car’ services.”

During a brief visit to China in January, Kalanick said that the huge sums of money being spent on subsidies by Didi Chuxing were the main reason the company appears to be losing to its Chinese competitor, and claimed that Uber has “30 or 35% market share” in China. He had already admitted to losing over $1 billion a year in China while speaking at a private event in Vancouver this year, Canadian tech news site Betakit reported. But Uber seemed determined to call Didi Chuxing out on the undisclosed amounts it was spending to keep its drivers.

“Our best information right now is that Didi is spending $70 to $80 million a week on subsidies—that’s $4 billion a year,” said Kalanick. “Over the last year we have gained significant market share in China and have spent far less than that.” The statements, reported on Tech in Asia, were quickly refuted as “outright untrue” by a Didi representative in an emailed response to the online tech publication.

The rivalry has continued along these rather petty lines for some time now, with Kalanick alleging that the Tencent-owned social network WeChat censors positive news about Uber.

There are additional strategies that Uber China could be adopting to ensure it is identifying opportunities in the market, says Foo. Transport services for higher-end users should be used as a “point of engagement”, after which other services could be delivered to this user segment. This has parallels with WeChat’s approach, in that China’s largest social network is believed to attract users mostly via third party apps (including Didi) of which it has millions. Once users have a reason to keep returning to the app, they are more likely to use its other services.

Foo sees high-end users as the market with the most potential. “Instead of fighting a winner-takes-all game, Uber should focus on its strength to capture the higher-end user segment,” he said. But, as Hu points out, “winner-takes-all” is a common mentality among VCs, and may also be what the market dictates. Uber is the world’s best-funded start-up by most counts—and recently took on an additional $3.5 billion of investment from Saudi Arabia’s sovereign wealth fund—but the BAT (Baidu, Alibaba and Tencent) dominance gives little room for start-ups, says Hu. “China’s market is big enough for multiple players. But due to the highly competitive nature of China, one player will eventually attempt to acquire its competition, much like how Didi acquired [rival] Kuaidi.”

Uber China’s drivers may not all be in it for the money, but understanding how price sensitivity can influence the habits of Chinese consumers across economic tiers may prove vital. They tend to gravitate towards the service that is cheaper. Additionally, the fact that Didi Chuxing’s vehicles can be ordered via the all-popular WeChat app is a major draw.

But perhaps the answer to winning over China’s growing number of smartphone users lies deeper than competitive pricing or partnerships. “Uber is a US company and they don’t understand Chinese culture or the Chinese situation,” Xu Ke, an employee at Nestle China and a frequent Didi and Uber user, explains. “That is why they can’t keep up with China’s changes.”

The company has a long way to go before catching up with Didi, but China is Uber’s largest market and Kalanick seems willing to invest as much time and money as it takes to win the battle. Several Uber China executives have indicated that a majority market share in China is not necessary for having a sustainable, profitable business, but Kalanick is determined to win it. “We like those problems that are hard, those are the ones that excite us most,” he told FT Weekend. “Those are the ones that give us that little glimmer in the eye and get us up in the morning.”

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