Why Uber Failed in China - YouTube

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It’s happened countless times before: A thriving American company enters China with

1.4 billion dollar signs in its eyes.

It sees in the country almost the ideal market: A middle class well over twice as large as

its own and without the generational brand loyalties of America.

Because China was relatively late in its technological development, it almost entirely skipped transitional,

“in-between” inventions like desktop computers and credit cards, making Chinese consumers

generally less skeptical of new technologies like smartphones.

Best of all, all this is available through one international expansion, one regulatory

system, one language, and one culture.

Or so, companies think.

What they find is often very different.

Relaxed regulation turns out to mean the law is ambiguous and enforced selectively.

Once a business model is proven, competition may spring out of nowhere, sometimes with

no regard for intellectual property.

And what looks like a single, unified market from the outside becomes thousands of unique

ones up close.

It’s happened, in one form or another, to Amazon, Google, Mattel, eBay, Home Depot,

Groupon, and many others.

Uber, however, was sure it was different.

It wasn’t ignorant of the titans that had failed before it, but, in the mind of its

outspoken founder, Travis Kalanick, Uber had faced many “impossible challenges” from

the very beginning — fighting hundreds of angry cities as the company rapidly expanded

across the U.S.

Its very business model was at best legally ambiguous, and yet, it succeeded anyway, giving

Kalanick a certain unchecked confidence which made China look like only another of its familiar

hurdles.

And to its credit, Uber did not make the classic mistake: Directing the expansion from conference

rooms in San Francisco.

It tried very hard to build “Uber China”, not merely Uber in China.

After boldly declaring it the company’s “number one priority”, Kalanick devoted

himself to the expansion like nowhere else.

He spent 70 days of 2015 in the country — nearly 1/5th of the entire year.

He even joked that he should apply for Chinese citizenship.

Uber created a separate, Chinese company, partnered with local investors like the Chinese

tech giant Baidu, and launched in 2013 in the country’s largest city, Shanghai.

At first, things were rocky.

For example, it launched with only US credit card support, making sure the vast majority

of locals, who use WeChat and AliPay, were unable to book rides.

Just as embarrassing, the app used Google Maps, which is notoriously bad in China.

By far Uber’s biggest problem, however, was, well, its entire business model.

The company doesn’t own its cars or hire its employees, meaning its only value is connecting

people who want to drive to nearby people to want to ride.

But because drivers and riders are regional, entering a new city is like starting from

scratch.

Uber may have a monopoly in LA, but that won’t mean anything when it expands to Seattle.

The good thing is that once it has the critical number of both drivers and riders in a particular

city, they’re very likely to stick with Uber.

It only takes 2.7 rides, according to the company, before someone becomes a permanent

customer.

Uber’s strategy, therefore, was to grow with lightning speed.

Every major city had its own general manager, who would tempt new drivers with bonuses and

new customers with free rides.

Becoming a driver was easy, no long background checks or complicated forms required.

This worked pretty well.

When it was first.

The problem was that, in China, it wasn’t.

It’s Chinese competitor — Didi — was founded in 2012 and had everything Uber needed:

immense scale, a China-first design, and the support of government.

While Uber operated by disrupting the taxi monopoly in each new city it entered, Didi

was much more old fashioned — it merely connected riders to existing licensed taxi

drivers.

So instead of inciting chaos and even violence like Uber, Didi was on the good side of authorities

— even helping manage over 1,300 traffic lights in partnership with city governments.

In 2015, Didi merged with its closest competitor, giving it near-monopoly control of the market.

It became the only company in the world backed by all three of China’s tech giants: Baidu,

Alibaba, and Tencent.

Apple and China’s sovereign wealth fund also invested around that time.

Uber was behind from day 1.

If a Chinese user already had Didi, the only reason they’d switch is if it was that much

cheaper.

To catch up, Uber had to dump insane amounts of money.

And, that’s exactly what it did.

Uber spent a jaw-dropping $40-50 million US dollars per week on free rides and bonuses

in China.

It lost, in total, $1 billion every year.

With Didi, it played a massive game of chicken — spending this much money was unsustainable,

but who would give up first?

This metaphorical arms race also created a kind-of cold war dynamic.

Didi allegedly sent undercover engineers to be hired by Uber, where they would collect

trade secrets and even conduct sabotage.

On occasion, Uber would be blocked from WeChat.

In China, this was the equivalent of Google hiding a competitor from its search results

— making it effectively invisible to the vast majority of the country.

And besides burning through cash like it was fuel, this subsidy-war also led to an unintended

side-effect: fraud.

In one Chinese city, Uber reported having as many drivers as London, Paris, and San

Francisco combined.

But how many of them were real?

When a “new” user was offered a free promotional Uber ride, the company still paid the driver

as normal.

This created a loophole.

Two users, one acting as the “driver”, and the other as the “rider” could collude,

taking a fake ride, and splitting the profit.

Soon, scammers created entire circuit boards with rows of SIM card slots, each simulating

a fake phone.

They would take a fake ride, swap out SIM cards, and repeat.

In one Chinese city, fraud accounted for an estimated half of all rides.

Over 30,000 fake rides were taken every day in the summer of 2015, just in China.

Uber fought back by creating a database of IMEI numbers, which are unique to a given

phone and thus allowed the company to identify a scammer even after they had reset their

phone.

However, Apple hid this number from developers starting in 2012 for its users’ privacy,

preventing Uber from detecting fraud.

Uber was undeterred and hired a 3rd party hacking company to bypass iOS’ security

rules, which, Apple discovered, warning them to stop.

In its typical fashion, Uber continued anyway, adding a line of code to check if the app

was running in Cupertino, California, where Apple is headquartered, and if so, not break

its rules.

Apple still found out, and called a very angry meeting.

Things were not going well for Uber.

It faced massive fraud, trouble with Apple, and over $1 billion a year in losses.

Then came the final nail in the coffin.

For its first few years in China, Uber operated in a legal grey area.

Like in the U.S., this subjected it to varying levels of retribution based on the mood of

each municipal government.

In the Southern city of Guangzhou, police raided the Uber office at midnight, accusing

it of running an illegal business.

In Hangzhou, another police raid was followed by a violent confrontation between Uber and

taxi drivers.

All this changed in July 2016, after a series of high-profile crimes committed by Didi drivers.

China legalized the industry, which came with strict new regulation, like there could be

no subsidies and drivers required 3-years of experience.

From now on, Uber would need to request formal approval from the local and national government

before expanding to each new city.

At the beginning of that year, Uber operated in 37 Chinese cities to Didi’s 400, and

had 229 million daily active users compared with 908.

Just a few short years after it had sprinted into the country with supreme confidence,

it had all finally become too much.

Just days after the new regulations were passed, Uber China was sold to Didi.

Uber took a 19% stake in Didi, and the leaders of both received positions on each other’s

board of directors.

Whether this was an embarrassing failure or a diligent strategic decision is still open

for debate.

On one hand, Uber unequivocally did not achieve its original goals of conquering the Chinese

market.

It left with only a minuscule market share and incredible losses.

It did not succeed where others had failed in China, and even though government protectionism

may be somewhat to blame, Uber certainly made many unforced errors along the way.

On the other hand, Uber spent $2 billion on China and left with assets valued at seven

billion dollars.

Viewed purely from the balance sheet, China was, unlike most of the company’s markets,

a source of pure profit.

It could now invest that money in other, more win-able markets in Southeast Asia and elsewhere.

So, a failure, yes.

But, also, a profitable one.

It’s too late to get in on the ground floor of Uber, but you can be one of the very first

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