Let me start with the following two propositions:
- I have zero inside information about Uber in China.
- I think Uber did the absolute right thing by selling most of its China operations to Didi. I base this less on what I know about Uber’s business and more on what I know about doing business in China.
The Washington Post, in its article, Why Didi Chuxing is buying Uber in China, has this to say about the deal:
Didi Chuxing, Uber’s archrival in China and the largest ride-hailing service in the country, is buying Uber’s China operations.
The deal has a lot of advantages for Uber, which is privately valued at $68 billion. The San Francisco company will receive a $1 billion investment from Didi, according to individuals familiar with the agreement. Uber, which will maintain its brand in China under Didi’s ownership, will receive a 17.7 percent stake in Didi, according to a press release sent from Didi. The terms are evidence that Uber put up a strong fight and that both sides had a lot to gain from a partnership.
It then gives us the obligatory company quotes about how the two companies working together will be able to achieve so much more than had they remained apart and how their deal will set the “mobile transportation industry on a healthier, more sustainable path of growth at a higher level.”
Yada, yada, yada.
Many years ago, I spoke at a high level conference in Hong Kong for a particular industry. My talk was on what these companies needed to do from a strictly legal perspective to get into China. I talked about the logistics of going into China as a joint venture, as a WFOE, and by staying outside of China and simply licensing their brand names and technology to Chinese companies. I was originally supposed to speak for around 45 minutes and I prepared my talk accordingly. But about an hour before my talk, the organizer asked me to do whatever I could to “stretch it out to 75 minutes” because one of the speakers scheduled for later that day had fallen ill. I had no problem agreeing as I speak without notes and strongly encourage questions and so I am used to having to adjust as I go along, usually by adding or subtracting examples or by riffing more or less on a point.
So on this day I would obviously need to riff more and I did. Oh how I did.
At one point, I started riffing on the differences between joint ventures that work and those that don’t and on how joint ventures tend to fail as soon as the Chinese side believes it no longer needs the foreign side. Then after I said that, I decided I would use this particular industry as an example and as I started doing that I starting musing out loud on how I did not understand what it was that Western companies in this industry had to offer Chinese companies and that when I had asked Western companies what would allow them to to outcompete their Chinese competitors, their answers were vague at best.
This did not make the audience (all in this particular industry) happy and after my talk a handful of participants rushed me to give me the same weak explanations I had already heard — all given with near religious zeal. As far as I know, no Western company has succeeded in this industry in China yet and it is looking like one never will.
Why do I bring up that event in this post? Because Chinese companies will almost always (though not always) be able to maintain lower cost operations in China than a Western company and so Western companies without other advantages generally don’t succeed in China.
Is this what happened with Uber?
Uber founder Travis Kalanick pursued the China market fiercely, and has made dominance in China a top priority. He visits the country frequently — attempting to woo everyone from local government officials to city police forces, which had cracked down on ride-hailing services (China legalized ride-hailing services in July). His first call in the morning was to his colleagues in China, the individuals said. The company entered the China market in 2014.
But the battle with Didi was costing both companies huge sums of money. Uber reportedly spent $1 billion last year. In China, they were neck-in-neck in a race to the bottom, frequently lowering their prices to lure consumers and constantly raising money to outdo the other. In the end, neither company was profitable in China.
At some point, it looks as if reality set in.
If true, Uber’s sale was both brilliant and timely. Uber gets a stake in China’s ride hailing service without taking on massive risk. Equally importantly, Uber gets to contribute and profit from its core expertise, without having to get too much into the muck:
Selling itself to Didi was a way for the company to stay competitive in China without burning through its cash. The merger will tie the fates of the two companies, both of which have global ambitions, together. As part of the deal, Baidu and other Chinese shareholders of Uber will also receive a 2.3% economic interest in Didi. Under the agreement, Didi Chuxing will also obtain a minority equity interest in Uber. Cheng Wei, founder and chairman of Didi, will join the board of Uber. Kalanick will join the board of Didi.
One big benefit Didi may get from the deal are software algorithms that Uber has developed. For far longer than the four-year-old Didi, Uber has invested in hiring data scientists and engineers who write code to match drivers with passengers, essentially triangulating people’s locations in real-time and then predicting supply and demand. Top talent in data science is still hard to come by, said Didi Vice President Stephen Zhu, in a recent interview with The Washington Post. To help identify and recruit talent, the company announced a $100,000 prize in machine learning — a branch of computer science associated with artificial intelligence, prediction, and data mining — in the U.S. earlier this year.
In the long term, Didi’s success will depend on its artificial intelligence algorithms, Zhu said. “Every user and driver have their own preferences and patterns — and we have to match them all in a second,”he said. “The core is artificial intelligence, in essence, the pattern of how people move around in big cities.”
I guess all I am saying is that companies — especially SMEs — should not be so quick to demand “full control” over what they do in China and should think longer and harder about how they can stick their toes into China via licensing deals and distributorships.
Our China lawyers get calls all the time from American, Australian, and European companies seeking our help in getting them out of China by extricating them from their joint venture or by helping them close down their WFOE. But I truly cannot remember an instance where we have been called to help a company get out of a well crafted China licensing agreement or China distributor relationship.
Just something to consider….