What does Uber gain by entering China?

Before leaving Hong Kong for graduate school, I spent some time in Shenzhen helping a friend with their startup. Every morning, I commuted to Shenzhen from Hong Kong and at around 9 am I would try to hail a taxi on the street, but morning was the time when it was impossible to hail a taxi by just standing there. The only way to get a taxi or a private car was through a mobile transportation app. This is why millions of consumers in China, including me, use Didi and Uber.

It is a well-known fact that many American tech companies have tried to enter the China market but few have been successful in a sustainable way. Like many of its predecessors, Uber has entered China. But what makes Uber stand out is that Uber has already surpassed its predecessors by capturing 30% of the China market – something that almost no other American tech company has ever accomplished. At the same time, the China market has become Uber’s biggest market, contributing 30% of Uber’s overall business and dwarfing its business in the U.S. market.

It is easy to be optimistic about Uber’s success in China. However, it leads me to think whether the current situation is really something that could benefit Uber in the long-run.

The China market for taxi service is huge. Mobile transportation ventures, like most other businesses, are not insulated from the allure of the China market. China has an urban population of 742 million growing at a speed of 20 million per year. With 44 megacities (i.e. cities with more than a population of 2 million), China has 8 cities that are larger than New York City. In contrast, the urban population in the U.S. is 259 million and is increasing by 2 million per year (comparing to 20 million in China). Moreover, the U.S. has only four cities with a population larger than 2 million. (source: World Bank)

In addition, Chinese cities, more than other cities in the world, need mobile transportation services: for every 1,000 people in China, only 79 owns a car, but in the U.S., the number is 4.5 times higher.

The China market has proved its potential through Didi’s performance: it took Uber 5 years to book one billion rides globally. In contrast, Didi, in 2015 alone, has booked 1.43 billion rides in China.

So, Uber has entered China. In early 2015, Didi dominated the market with 95+% China market share. By the end of 2015, Didi’s market share had dropped to 70-80%. At the same time, Uber China claimed a market share of 30% with just one-year of effort in China.

It is easy to be suspicious of Didi’s ability to defend its home field and to be optimistic about Uber’s achievement. However, this is not entirely the true situation.

Because of low user loyalty, both companies are spending a lot of money getting riders and drivers on board. In other words, both companies are burning their share-holders’ equity to maintain and grow their market share in China. Neither one of these companies is making a profit now – they live on venture capitalists’ money. So, let us take a look at their funding status.

Sponsored by both Tencent and Alibaba, Didi is one of the most well-financed tech startups in China – not only financially financed, but strategically financed. Tencent and Alibaba each holds more than 10% in Didi with the rest held by all top 25 venture capital firms in the world. Uber, in contrast, has been on a fund raising tour since its birth.

The access to funding differentiates Didi from Uber. Because of the strategic relationship with Tencent and Alibaba, Didi’s service can be accessed via both WeChat app and Alipay App. WeChat app has registered average MAU of about 700 million and the latter sees about 400 million MAU. In China, Uber relies on its mobile app and on Baidu’s map service with the latter registered only about 250 million MAU.

Didi has a stronger distribution network in China than Uber. But in this game, more importantly, the China market means different things to Didi and to Uber.

Uber, as an international technology company operating in China, is challenging the track record: in recent history there has been no international technology company who was able to build a sustainable success in China: Google, Microsoft, Amazon, you name it. As we celebrate Uber’s success in China, we should be very conscious of the repercussion of this success: the present success positions Uber on a weird pivotal point. On the one hand, Uber is drawing more rides from China than from the U.S. making China the biggest market for Uber, and on the other hand, given all the preceding failures of international tech companies in China, Uber is highly unlikely to succeed in China in a sustainable way.

For a loss-making technology company who sustains its operations via venture capitalists’ money, losing its biggest market (i.e. China) will jeopardize its ability to raise the next rounds. Without the next round of funding, Uber will not be able to sustain its operations in its homeland (the U.S.). Uber’s founder, Travis, spent 75 days in 2015 in China just because Uber cannot afford a failure in China.

To put it nicely, Uber’s decision to enter the China market leaves much to be answered. To be straight-forward, Uber’s decision to enter China is a strategic long-term mistake that can end up killing it. I expect senior management at Uber will re-consider its China strategy seriously – what really has Uber to gain by entering the China market?