What Does Uber’s Retreat Say About the Ability of U.S. Internet Innovators to Succeed in China?

Uber didn’t just bumble into the China market without a good map of the pitfalls that doomed so many other U.S.-based Internet companies trying to make it in China. In fact, they studied the failures of their predecessors carefully, and avoided many of their missteps. They created a highly autonomous China entity and gave their people on the ground extensive decision-making power, allowing them to take the gloves off where needed—not that Uber as a company has ever shied from doing so. They partnered with, and received investment from, China’s largest search engine (Baidu), and leveraged not only Baidu’s market position (by integrating Uber directly into Baidu Maps) but also its deep experience with government relations. Uber committed huge amounts of capital, and paid out billions in subsidies to win market share. They offered services tailored to the Chinese market.

And all things considered, they didn’t do at all badly: They rolled out aggressively into many Chinese cities, and for a while even enjoyed a market share lead in some of those cities, like Chengdu and Xiamen.

That despite all this Uber ultimately surrendered to Didi Chuxing shows just how tough local competition has become, and should give would-be entrants even greater pause. I doubt that within my lifetime I’ll see a major U.S.-based Internet company win a market share lead over domestic Chinese competitors. (Conversely, I doubt even more strongly that I’ll see a Chinese Internet company make significant inroads into any major Western market). The China Internet market will prove elusive to American Internet players even when censorship and other Chinese government policies aren’t significant factors—and just to be clear, they weren't real factors in Uber’s case: some municipal governments may have played favorites, but Beijing mostly kept out of the ride share war that’s raged on for the last few years. This was a fair fight—or more precisely, both parties were free to fight dirty.

But it was an uphill fight for Uber from the beginning. A manager is, after all, always at a natural disadvantage when competing with an entrepreneur; the entrepreneur always has more skin in the game. And when that entrepreneur is focused on a single market, has nearly inexhaustible resources, can draw on the strength of China’s two largest Internet companies (Tencent and Alibaba both, since Didi’s absorption of Kuaidi in February 2015), and is determined to destroy its competition by any means, you know who to bet on.

Uber got good terms of surrender, though. The devotion of that much time, attention and capital by Uber’s senior management toward a market destined to bleed money for the foreseeable future just didn’t make sense. Now Uber ends up with 20 percent of the merged entity, and that’s nothing to sneeze at.

Unlike many, I don’t see Uber China’s acquisition by Didi Chuxing (“Didi”) as the end of Uber’s story in China. Nor do I put it in the same category as many other well-known Silicon Valley failures in the world’s largest internet market. Uber China investors will soon own 20 percent of Didi (valued at $35 billion post acquisition). In exchange, they would give away a little more than 10 percent of Didi’s market share. That is a great illustration of what the old Chinese proverb says, “retreat for the sake of advancing (以退为进)”.

Uber was able to grow from 10 Chinese cities to 60 over the course of 12 months, a laudable effort considering how heavy the overhead is for running a strictly regulated cab-hailing business in China. I think one lesson that Uber China has taken to heart from its western predecessors is that, the headquarter knows it cannot strategize about China while sitting in the Silicon Valley office. Uber’s management values China enough that they gave the local team a massive amount of autonomy, and the leadership is among the most-seen western business leaders in local Chinese events and press. All of these have shown the newer generation of Silicon Valley entrepreneurs’ galvanized determination to listen, to adapt, in order to win.

That said, Uber China still finds itself struggling to move fast enough to meet Chinese consumers’ appetite. Uber is widely seen as one of the most aggressive companies worldwide, but in China, where deep mobile penetration, seamless connectivity and fierce competition have allowed consumers to be extremely demanding, Uber’s pace falls short.

Here is one example. More than once when I used Uber China in Beijing, I found the driver would not call me when he/she arrived (the location on Uber China’s map was often not accurate enough for the driver to easily find me). The reason has always been the same: I registered a Uber account using my U.S. cell number, and when the driver tried to call me, it would dial an international call which the driver cannot afford. So they would discontinue the call and circle around, expecting me to miraculously spot the car from the busy Beijing traffic. I always ended up being the last one to be picked up if all other friends chose Didi. It is simply hard to imagine such technical issues are not resolved by a local startup over a couple of weeks, if not days. The minor inconveniences have grown and gradually eaten into Uber China’s traction.

Despite all the barriers that China presents, I continue to think it is a promising market for western companies who dream big and want to win big, especially in areas where local startups are not yet able or willing to dive deep into. That would include frontier technologies such as robotics, artificial intelligence, and developer tools. But that's a discussion for another time.

Uber is one of those companies that people love to hate. It’s thus unsurprising to see a flood of media schadenfreude over Uber’s supposed failure in China. There’s no question that Uber was humbled by the Chinese market. But the Didi deal was hardly a disaster for the company. As an article in The New York Times notes, “The $2 billion Uber spent tackling China is now worth about $7 billion in the new merged entity.” You don’t have to be an economist to understand that a $5 billion gain is not exactly a failure. As Kuo notes, “Uber ends up with 20 percent of the merged entity, and that’s nothing to sneeze at.”

Uber is a failure in the sense that it did not conquer the Chinese market. If that is the metric we continue to use to measure the performance of Western companies in China, then we can expect a lot more “failures” to come. But this narrative is outdated. First of all, the Chinese market is not winner-takes-all. A U.S. company can make serious money just by capturing a relatively small slice of China’s enormous consumer market.

Of course, some U.S. companies do fail in China, due to both political obstacles and/or business mistakes. But that is not the same thing as coming in second to a fierce local competitor, especially one that had first-mover advantage in China. It’s time to retire this outdated “dominate or die” narrative. China is not some sleepy tech backwater that is ripe for Western conquer. As this recent New York Times article points out, “China’s tech industry—particularly its mobile businesses—has in some ways pulled ahead of the United States. Some Western tech companies, even the behemoths, are turning to Chinese firms for ideas.”

I agree with Bao that China still offers promise for Western companies. Sure, U.S. tech companies will have their work cut out for them. But even if they don’t become #1 in the Chinese market, that’s not the same as failure.

Uber’s loss in China is a failure that has to sting. Walking away with a 20 percent stake in Didi helps dull the pain, to be sure, but just two months ago Uber was talking about how it could overtake Didi in 2017. However you spin it, handing the Uber brand over to Didi and heading home is a far cry from that. This is a failure, albeit one that Uber has handled about as well as could be expected.

For other aspiring foreign Internet companies, I think Uber China’s exit is mostly bad news, because it’s hard to pinpoint much the company did wrong. Uber did a good job localizing its app and services. It picked what (on paper) looked like the ideal local backer in Baidu, enabling it to integrate itself into the hugely popular Baidu Maps. It raised the gargantuan sums of money needed to keep up in China’s cash-burning Internet industry. It hired local management who understood the market. Uber did everything a foreign company entering China is supposed to do.

That doesn’t mean the company did everything perfectly. I suppose it could have entered China sooner and tried to beat more of the local competitors to market. It could have tried to move first and buy out Didi Dache or Kuaidi Dache as soon as it became clear that the ridesharing market in China was a three-horse race and an alliance between any two might be enough to beat down the other. But either of those options would have required even more money and significant strategic resources that Uber China might not have had access to at the time.

The big difference-maker may just have been necessity. Some reporting on the buyout suggests that the Uber China selloff happened in part because Uber wants its global numbers to look better for a future IPO. That’s indicative of the difference between the two companies. Uber and other foreign firms always have the luxury of being able to back off, to sell out and walk away from China with the knowledge that they’re still globally powerful businesses. Didi and other Chinese companies don’t have that safety net. For them, it’s win or die. There is nowhere to retreat. As Kuo said, that can make a difference. The more skin you have in the game, the harder you’re liable to fight.

Focus may also be a factor. Didi clearly has global ambitions; the U.S.$100 million it poured into Singapore’s Grab earlier this week is evidence enough of that. But like most Chinese companies, it didn’t venture too far outside of China’s borders until it had the home market locked down. Foreign Internet companies come to China with important parts of their business elsewhere, and financial pressures from other markets can affect their China business. Their Chinese competitors virtually always have only China to worry about.

That’s not to say that a foreign company could never beat a Chinese company. But in circumstances like these—where the Chinese company has a head start, total domestic focus, powerful backers, and virtually limitless cash to draw from—I think the chances of the foreign company winning are virtually nil, even if it does everything right.

Still,Uber was wise to back out when it did and to walk away from the table with a stake still in the game.