Uber may never dominate in China—but it doesn't need to

Transport appocalypse

Uber may never dominate in China—but it doesn't need to


First they rose up in London, then New Delhi, Brussels, Taiwan and the US—Taxi companies and cabbies across the globe are protesting the growth of the transport app. Now they are rising up in mainland China. This week, China Labor Bulletin reported that of the 70 recorded taxi driver protests so far this year, a third were directly related to unlicensed taxis.

One transport app firm at the center of some of those protests seems dead-set on attaining global monopoly: Uber. In some regions outside of China such demonstrations have been successful, as Uber is now banned in Brussels and Spain. But in both places its tendrils keep creeping back into the transit sector. CEO Travis Kalanick is famous for his strategic ruthlessness, securing Uber’s supremacy through what some call underhanded sabotage or by striking deals with large-scale investors like Goldman Sachs and Google. In places like Philadelphia, local policy makers drafted new regulations on applications and car hiring services only to have Uber’s customers petition for a halt to the new legislation. Where legislation is pushed through, offending services are replaced with new, compliant and no less aggressive options.

The Chinese taxi app market is already dominated by two local companies that threaten to forever thwart Uber's fledgling local efforts—regardless of the proliferating protests by cabbies across the country and the local governments that feel increasingly pressured to take action on their behalf. Yet the market is too tempting and the stakes too high for Uber to just give up the fight, and a powerful local partner in Internet search and services firm Baidu – as well as what appears to be an imminent tie-up with another local rival – may help the San Francisco-based company turn the tide in a battle it has been struggling to win since its launch on the mainland in 2013.

Cut off one head...

Kuaidi Dache and Didi Dache, both launched in 2012, together reportedly cover 99% of the market. In early 2015, they announced plans to merge, which if successful would create an unprecedented taxi-hailing behemoth. Transportation apps face legal battles in China as elsewhere, evidenced by police raids on Uber’s Guangzhou and Chengdu offices in the past few weeks. These raids have led to speculation on Uber’s future in China, and the general conclusion at this point is that it will not be a long one.

However, such a view underestimates the multi-faceted nature of Uber and the shifting nature of the transport app market that has allowed it to expand into 57 countries since its inception in 2009.

By rights China should be the ultimate destination for Uber. First, second and third-tier cities all have large, dense populations with deep smartphone penetration: roughly 172 million people used taxi-hailing apps in China as of December 2014, according to an iiMedia Research estimate. In addition, due in large part to rapid, uneven growth over the past few decades, transport infrastructure in many cities is underdeveloped, with taxi companies operating within a government-ordained monopoly. The market opportunity for transport apps is so massive that even a small slice of it would be profitable.

But the market is also notoriously fickle, said Andrei Hagiu, a professor at the Harvard Business School and a specialist in business strategies for multifaceted platforms (including Uber). The same low barriers to entry that make apps easy to start using are also a problem for companies seeking to establish an iron grip on the market. In the US, he said, switching costs are low enough for users to switch between Uber and rival app Lyft, with drivers routinely trying out new competing apps. That means that even a 99% market share is nowhere near as stable as it would be in other sectors.

"As an investor, I’d be worried that these switching costs are not high enough to create significant barriers-to-entry," Hagiu continued. Thus Uber’s share of the Chinese market, paltry though it may currently be, may yet grow to match its global mobile net-enabled reach.

Adaptability is also a key factor: In a constantly shifting market where customer loyalty is virtually non-existent, companies need to maintain interest in their services by offering various tailored services on the same platform. Uber already offers users their choice of cars and prices, but Hagiu says the firm is likely to expand into other services such as food or package delivery. The firm has already slipped quietly into the charity sector in the UK, and the popularity of business-facing delivery services like Sherpa’s suggest Uber could find further footing in China.

Given the ruthless and adaptive tactics Uber has deployed elsewhere, it can be expected to seize any opportunity to grow its presence in China. Its $40 billion valuation and prodigious investor backing has allowed it to subsidize rides elsewhere so that customers pay less than they would with an ordinary taxi even as drivers still earn a full salary, all simply to grow the app's user base. Reports have even detailed Uber hijacking customers and drivers from rivals as well as tracking journalists reporting on the company. Outrage in the US and elsewhere led policy makers to take a defensive attitude towards Uber and similar apps.

Hagiu suggested that Uber’s has been too confrontational with competitors and regulators. "I think they should have engaged regulators earlier and on friendlier terms, which would have helped their cause in countries like Spain and Germany, where they are facing serious hostility from the local regulators," he said.

Underdevelopment, overreaction

The mainland has seen its own share of hastily ushered laws and half-baked regulations to deal with the mobile-ready transit market, including banning private cars from being used commercially earlier this year. The Ministry of Transport recently stated that carpooling (or ridesharing) for profit would not make inroads in China in the foreseeable future. Faced with a death sentence, Uber sidestepped the issue with one small change: mainland-focused People’s Uber (known as UberX in other markets) operates on a not-for-profit basis, thereby skirting the wrath of Chinese law. But it's not the only transport app firm in China being kept on its toes.

Kuaidi Dache and Didi Dache are likewise suspected of acting contrary to Chinese government interest, if not in direct violation of Chinese law. Last July the government prohibited the "tip-bidding" that the firms had institutionalized as a part of hailing taxis online. The planned merger between the two has provoked Yidao Yongche, another transport app company similar to Uber, to file a lawsuit claiming the resulting company would violate China’s Anti-Monopoly Law.

While perhaps logically sound, the case against isn't guaranteed. Professor Jinmin Wang, a specialist in entrepreneurship and innovation in China at the China Policy Institute at the University of Nottingham, says the merger would indeed constitute a violation of the law. However, he added that the new firm might be exempt from the anti-monopoly investigation “for the purpose of upgrading product quality, reducing cost, improving efficiency, unifying product specifications or standards, or carrying out professional labor division” under Article 15 of the Anti-Monopoly Law. Even if found exempt, the law would result in close scrutiny for a Kuaidi–Didi hybrid.

Police reaction to domestic companies’ misdemeanors has for the most part been given longer shrift: A few days after police raided Uber in Chongqing, Didi Dache was asked to remove its private car operations in Wuhan. But the kid gloves came off Tuesday when the Luoyang offices of Didi and Kuaidi were suddenly shut down by police without warning. This reaction may indicate that hostility toward these apps is a problem with the market rather than Uber itself, but the impact of raiding a company that has less than 1% market share is likely limited.

Wang said that Uber had been "singled out for raids because it is the leading international taxi-hailing company operating in China." However, he was optimistic about the future of transport apps more generally, and suggested their increasing popularity could accelerate reform of the taxi markets in China.

"Customer outrage is increasingly influencing the policy makers in China," Wang said. "The Chinese government has already realized the shortcomings of traditional taxi services to satisfy public demand for more diversified taxi services with new technology. It can be expected that the traffic authorities in China will continue to improve its regulation of traffic apps and allow more licensed private drivers to offer for-hire vehicle services in the long run."

Über allies

In 2014, Uber announced that Baidu had invested in its operations in China, although it did not disclose how much. That meant Baidu’s relationship with Uber placed the company in its corner against Kuaidi Dache (backed by Alibaba) and Didi Dache (backed by Tencent). On the ramifications of the Baidu deal, Wang said that the successful mainland Internet services firm could "help Uber establish a good relationship with the Chinese government." Given the currently vague laws for transportation apps, Baidu backing could help push policy in a direction more favorable to Uber.

The deal is a plus for Uber’s business development in China is as well: It has already converted to Baidu Maps and Alipay to attract Chinese customers, with the latter Alibaba-based service set to end soon following Baidu’s recent announcement that its new partner would start using Baidu Wallet as its main online payment channel in China. "As the leading search engine in China, [Baidu] has sound knowledge of the Chinese business environment and e-commerce market, [and] can adapt China’s business model to the Chinese market."

Both Kuaidi and Didi have thrown money at their customers and drivers, in a successful attempt to dominate the market by offering the cheapest ride and highest wages, even at the expense of their own profits. Uber is well-versed in the strategy of building up a customer base first and then focusing on profit; with Baidu’s investment, in addition to the $40 billion valuation from investors in the US, it can likely afford to deploy a similar strategy on the mainland.

But dominance may be beside the point. The Chinese market is so large that large market share is not necessary to be profitable—particularly if you aim high. Uber’s main strengths in other markets center on product quality, and it seems likely to position itself upmarket in China as well. The Uber Black service offers a comfortable and convenient ride for roughly 50% more than the price of an ordinary taxi fare and uses professional hire cars.

Some have speculated that it may even be looking to merge with Yidao Yongche, a Chinese firm that targets the same market segment, and those suspicions were seemingly confirmed this week when said company posted an image to Sina Weibo of a heart connecting the two companies' logos, accompanied by the text "It's best to be together." Playing to the love for unrestrained opulence among China's nouveau riche, Uber recently introduced such stunt marketing features as UberChopper and even ferry services for crossing Hangzhou’s storied West Lake in style.

While Chinese competitors are also cultivating upmarket cohorts, as an international brand Uber is also more likely to appeal to foreigners living in China. Though the impact on its user base may be limited, a continuous stream of expat business could help maintain profits. Hagiu said surge pricing, Uber’s brand of dynamic pricing, is one of its main strengths, allowing the app to "adjust prices to match supply and demand better than its competitors," an essential feature in a country which is already underserved by its transport companies. While surge pricing has met resistance elsewhere, China’s existing practice of drivers bartering off the meter during high demand periods implies that it is likely to meet with more success here.

Though unlikely to dominate in China as it has done Europe, the Americas and elsewhere, Uber is likely to have more success than recent weeks suggest. Regulation and resulting legalization of a burgeoning e-commerce industry that challenges the stagnant taxi leviathans would be unambiguously good. If Uber adopts a more conciliatory approach towards regulators, both it and China's cities could benefit. 

Author: Georgie Barber

Editor: Hudson Lockett (@KangHexin)