Uber + Didi = DuDu?!
What the UberChina + Didi Deal can show us about doing business in China.
The largest deal this past week that rocked the ridesharing world is that Didi acquired UberChina for $8 billion USD. The bottom line is this:
It is very difficult for foreigners to do business in China
No duh! But here is a perspective from being in China for over a year and as a founder of a company who has a WOFE (Wholly Owned Foreign Entity) in China, and doing business in China.
Technology companies
To operate as a technology company in China, you need a license to be able to run your servers from within China. Of course you can run your servers outside of China, but it will be really slow and there is a risk that the government can block your IP address easily. This is one of the main reasons why technology companies partner with a local party to gain access to the ICP license held by the local entity.
Social Apps and Websites
I had asked many expats and locals the question of why China just did not shut down Uber if it was so disliked and “illegal”. I had many answers, but the one that made the most sense (from a local) was that Uber was not a “social” app or company and therefore the government would not be able to block that one without having to block their local offering as well. There wasn’t good reason to block it. Of course both of them were operating illegally until recently.
The larger concern the Chinese government has is around information flow that could lead to issues of providing safety and civil unrest for a world of 1.2 billion people that has a past of being fragmented, with unification a constant theme through their history. Furthermore, education levels across the entire country vary, with about 85 million people still left uneducated. This is why censorship from the government’s point of view is for the greater good of the entire society. With that point of view, someone can understand why Facebook, YouTube, and Google would be blocked vs. something like Apple, Nike or Uber.
Government Bodies
China therefore has regulation around things that influence their culture, which is mainly through entertainment and social apps. Currently the quota is only 34 foreign movies allowed into China.
This impacts cultural lenses for foreign startups entering. This hits home for our company as we launched our Marvel game for China ， 漫威格斗 (Manwei Ge Dou) because the cultural references on some characters were not there, nor did China grow up on the comic books. While Marvel is a popular franchise in China, it is a much less familiar franchise than the ones the Chinese grew up with.
Now that is just entertainment, imagine the other cultural references (which turn into regulations) that they may not have (or more than likely replaced by other things that you don’t have) when entering the market. Note: While this is true of any other country, China is special in how it has been closed so long to Westerners, so it is more “foreign” than most countries to the West.
Local Practices
Didi is a little different than Uber. Didi attacked it with a local mindset. While China is a develop(ed) a country, it approaches business with a developing mindset.
Therefore, the mindset of going global begins locally.
Here is a list of differences (not exhaustive), when it comes to the two services:
Fapiao (发票）
A fapiao is a legal invoice (or receipt) that legitimizes the transaction in China and is a way for the government to track and monitor taxes paid on transactions. This obviously is helpful for tax deductions and reimbursements of expenses (but talk to a tax accountant for your situation!) This is printed by the business, usually at the time of transaction, and different for each industry. If you are using it for expense purposes with your company, you need to ask for it or the company will not reimburse you. Legal taxis will print this out before you leave the taxi.
Most locals will complain about Uber China’s 发票 system which is cumbersome that involves email.
You are in a mobile app, why open up email, which is not always installed on a China worker’s phone. Because culturally, email is used differently in China than in Silicon Valley. In Silicon Valley, you can expect a response as quickly as in chat; however, in China WeChat still reigns to get a quicker response. We have seen this in our Beijing Office. It is better to send a wechat message out to our employees if we need to tell them something timely, otherwise they check email around once a day. I usually tell my Silicon Valley counterparts if something needs to get done quickly to do it over Wechat.
On the other hand, Didi’s seamless integrations allow you to complete this within the application that allows you to access the needed documents in a local-friendly way:
Local Taxis
Didi’s integration is with the local taxi system enables more supply of drivers within their service at a cheaper price. In many ways Didi allows riders to literally hail a taxi from the phone rather than “ridesharing” with “driver”.
UberChina introduced with a private black car service within China without the integrations into the local taxi service. When they wanted to offer a cheaper version of their service, they opened up People’s Uber allowing normal car owners to offer rides and become a driver.
However, one thing that was miscalculated: car ownership in China is quite expensive and lower per capita. To get a foreign car, you will at times pay 4x the price for a luxury car due to taxes. This means the supply of drivers is a lot lower for Uber China, causing the usage of the service lower.
Furthermore when a person just wants to get from point A to point B, a private car is not necessary.
Bonus Structure and Fraud
In a fight against each other both UberChina and Didi were offering aggressive bonuses and subsidies to get more drivers on the road for their service. This was great for riders, but bad for the companies.
Higher bonuses opens the door to more fraud, that involve several parties or several steps to to create multiple accounts. However, in China where the population is 1.2 billion people, finding willing participants is not difficult. Also finding ways to skirt the system can easily be done through buying multiple Uber driver accounts on Taobao （淘宝）, China’s largest e-commerce site to find anything — literally (even fake prescriptions). This means someone can be sitting at home with multiple accounts picking up and dropping off people without having to leave their home, while Uber has to pick up the bill.
Didi on the other hand is also impacted by fraud; however, because the driver bonuses are lower, it does not attract as much activity as Uber.
While offering big bonuses have gotten more drivers on the road; at what cost, and how much of them were real? Uber has claimed to provided 1 million rides a day, costing them $1 billion dollars a year.
You do the math.
Payment Methods
Integration for UberChina favors foreigners much more than locals. UberChina runs on a credit card payment system, but China does not. China’s credit card penetration is about 10%, the rest of the country runs off of a debit card system (UnionPay being the largest), with a high adoption of mobile payments via Wechat, China’s most popular mobile messaging service. Paying through UberChina is not as accessible and it wasn’t until 2014 they were able to use a local payment system like Alipay.
Didi on the other hand, backed by Tencent and Alibaba enjoys a seamless integration into the Wechat Wallet:
The fierce ridesharing battle in China over. The foreigner has lost, proving once again that China is formidable.
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I am the co-founder and Chief Development Officer of Kabam, and have resided in Beijing, China for over a year. These perspectives are my own and do not necessarily represent Kabam.