Didi win over Uber spurs China questions

The home-grown online ride-hailing firm has comprehensively outmuscled its US rival Uber’s efforts in the country. While the deal it struck is under scrutiny, it is a note of caution for foreign investors.

An Uber Station outside a hotel in Chengdu, in southwest China’s Sichuan province. AFP

Beijing // Former enemies Uber Technologies and Didi Chuxing, the US firm’s Chinese internet ride hailing rival, recently locked themselves in a US$35 billion embrace – causing a stir among tech investors.

The move saw Didi take over Uber China and Uber pick up 17.7 per cent of Didi’s shares.

The deal initially illustrated concerns about whether foreign companies can play an effective role in China’s technology industry, after it was inked on August 1.

But new issues are coming to the fore, including the government’s role in mergers involving Chinese companies, creation of monopolies and investing in businesses that make no profits.

Jacob Cooke, the head of the Beijing-based consultant Web-Presence in China, does not agree with speculation that the government may have favoured Didi and somehow persuaded Uber to pull out of China.

“There isn’t a lot of evidence to say Uber was unfairly regulated against [compared with] its rival,” he told The National. But Didi had other advantages making it difficult for Uber to handle the competition, he says, adding, “It must have been easier for Didi to raise capital and that’s something Uber couldn’t compete with in China, definitely.” Far from supporting Didi’s deal, the government is now putting it under pressure. The ministry of commerce has launched an investigation to see if the deal has violated the state’s anti-trust law. Beijing has larger concerns: it does not want to be seen as encouraging monopolies because this can frighten off foreign investors, analysts say.

Didi is believed to have convinced Uber the deal would not fall foul of anti-monopoly rules because Uber was not making a profit, sources say.

Chinese companies usually obtain the direct or indirect approval of local authorities before inking mergers and acquisitions deals. It is difficult to imagine that three companies, Didi, Uber and Apple, which recently entered the ride hailing business by pouring $1bn into Didi, would misread the government’s standpoint.

But there is a strong possibility looming that the government might reject the deal under anti-monopoly rules because Didi now controls more than 90 per cent of the online ride hailing sector in China. The industry turnover last year was US$500 million.

Much depends on how the government looks at the ride hailing business in general. It recently described it as “internet-booked taxies” that provide “differentiated” services – thus implying that the online haling sector is an entirely separate one from traditional cab firms. Seen from this perspective, Didi is definitely a monopoly.

But if the government chooses to see it as merely as a standard taxi company, Didi’s share of that whole market is a small one and thus it is not a monopoly, some experts say.

Jost Wubbeke, the head of programme for economy and technology at the Mercator Institute of China Studies in Berlin, says whatever the view, the internet prominence of the new Didi entity is bad news.

“The near-monopoly of Didi on the Chinese market is not a good message for customers, as prices might rise.”

Mr Wubbeke says the internet is generally pushing market power into the hands of fewer enterprises, such as e-commerce and instant messaging. “However, the market is very dynamic, and new challengers can still easily arise” he said.

Foreign investors are asking why Uber, which has successfully grown roots in dozens of different countries, could not survive in China, and if this should be a lesson for to those looking at backing firms in China’s technology market.

The government has already taken out Apple and other western companies from its list of approved companies for official procurement. Google, Facebook, Twitter, YouTube and several others are still not allowed to operate in China at all.

Apple has been particularly hurt, suffering a sudden plunge in the sales of its products. Greater China sales, once the tech giant’s fastest growing market, fell to $12.49bn in the second quarter, the company said, a 26 per cent year-over-year decline.

That came as the Chinese firm Xiaomi intensified the competition by releasing a three-camera mobile phone, and an “air” laptop, which is similar in design to Apple’s MacBook Air.

Jeffery Towson, a professor of management at Peking University’s Guanghua School, says the government had no role to play in Uber’s failure in China. “Didi mostly won because it had a big first-mover advantage,” he said.

“Uber was late to the market and at a big disadvantage. Didi also had strong tie-ins with Alibaba and WeChat platform. That combination was too much for Uber to overcome.”

But he acknowledges Uber managed to capture a strong, second-place position in China despite the challenges.

Prof Towson thinks most foreign companies get beaten in China because they are the late entrants, usually coming in well after local firms have invested heavily and built huge capabilities (such as factories, steel mills – or hiring drivers in ride hailing services). When foreign firms enter, they face oversupply, and all players start losing money.

“This situation is also more difficult for companies funded by venture capital,” Prof Towson said. “Strategic players tend to be able to bleed longer. It’s something Silicon Valley should seriously consider when thinking about China. It’s common and pretty brutal.”

The internet ride hailing market is not populated with many players. Didi has a huge presence, which made it impossible for Uber to compete, Mr Wubbeke says.

“Although some official regulations hindered Uber’s China business, such as the ban on the use of Google Maps, the company mainly had to surrender due to Didi’s overwhelming market dominance for car-hailing apps,” he said.

The situation throws up the question of whether foreign investors should continue to pour funds into hailing businesses that do not make money and merely survive on the strength of investments.

“I think the more important issue is the basic question of whether online ride-share apps can be profitable,” Scott Kennedy, the deputy director at the Freeman Chair in China Studies in the Center for Strategic & International Studies in Washington, told The National.

“Uber is struggling to make ends meet everywhere, and it is depending for survival in part on the enormous pool of funds it has amassed from investors.”

The Uber-Didi deal has highlighted the “basic challenge of making the ride hailing business profitable in China”, he added.

In the end, Mr Wubbeke says, home advantage paid off for Didi in its defence against with Uber.

“The fierce battle for market share was a big loss-making business for both companies,” he says. “With huge losses in China, but only modest market influence, Uber had to surrender to Didi.”

That is a concern for all foreign firms and investors considering entering China.

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