When Uber sold its Chinese business to local competitor Didi Chuxing, many headlines regarded the deal as a surrender on Uber’s part. After all, Uber was losing $1 billion a year in China while Didi was profitable. However, what Uber received in exchange for its Chinese operations was a 20% minority stake in Didi (valued at approximately $35 billion post-acquisition) and a $1 billion equity investment. In other words, after investing $2 billion in China, the deal was worth an estimated $7 billion to Uber.
While the sale was widely regarded in the US media as, a failure in globalization, a better way to summarize the story of Uber in China might simply be one of, “if you can’t beat ’em, join ’em.”
Lessons for Companies Expanding into China
From a narrowly Western point of view, it’s true that Uber failed to succeed in the same way it has succeeded in most of its other international markets. Usually, Uber enters a new market early, and quickly becomes the local leader. It might be tempting to tell Uber’s China story as one of yet another American company blundering into a country without fully understanding local dynamics. In fairness, Uber has done plenty of that in other markets, garnering the company a lot of bad international publicity along the way.
But international strategy is rarely so black and white. And neither is the picture of Uber’s experience in China. Here are some of the classic lessons that businesses learn when expanding into China, and some notes on Uber’s experience with each. I’ll argue that, for the most part, when it comes to entering China, Uber actually got it right.
1. Take time to learn the local ways
This advice is so obvious that it at first glance it might even seem unworthy of mention. But in China, perhaps more than in most countries, you need to take it seriously in order to have any level of success. It isn’t enough to have a single international leader or even a small team do the learning. Organization-wide learning has to take place, across all departments, and this is very difficult to rush. In the hustle to beat a competitor for a land grab in a new market, many companies expanding into China short-change this phase, but they do so at their peril.
Functional leaders and their managers need time to learn the details of doing business in China. That means understanding its legal system, regulatory rules, political system, buyer preferences, local infrastructure, financial markets, and local banking system. Businesses must devote an ample amount of time to up-front market research in order to create a solid go-to-market strategy developed with people on the ground who truly understand China. This simply can’t be done within the walls of an American boardroom.
Uber did in fact hire a strong team of local players. Rather than dictating to them from Silicon Valley, Uber also gave the local team plenty of autonomy. However, it also takes the local team time to learn a brand new product, and a brand new business. The greater the cultural distance, the more time you need to allow. And in fast-paced China, with strong local competitors already in place, Uber didn’t exactly have the luxury of a lot of time.
2. Develop a highly localized offering
For most international markets, companies don’t necessarily need to brand themselves differently, let alone develop entirely new products. If the brand already has global strength, many customers in European countries, and even many Asian countries, are surprisingly tolerant of Western brands, even when the name isn’t that easy to pronounce in the local language.
China is completely different. Most companies do need to have a distinct brand identity for China, or at least a local variation. Chinese consumer and business buyer tastes are highly different from those of Americans, and many companies find they need to adapt the product itself, or even develop a totally Chinese version. Uber took this to heart, offering a local product called “People’s Uber,” and embraced messaging that was more socialist in nature than capitalist.
Uber also tried to adapt its product to market needs. Early on, Uber customers in China were required to validate a credit card in order to open an account. But credit cards are not commonly used in China. Other forms of payment are. Before it actually had its formal launch in China, Uber began accepting payments through Alipay. The lesson? Accepting local payments is absolutely critical to enabling purchases, and should have been on Uber’s radar even earlier in the game.
To reckon with China’s famous firewall, Uber also installed servers within China, a smart move. However, Uber started out using Google maps, even though these were notoriously inaccurate in China. The company later changed to the more popular local favorite, Baidu maps instead. Again, this could have been done earlier in the market entry process, but at least Uber was nimble enough to quickly adjust and adapt.
3. Find strong local allies
In China, you simply can’t go it alone. This mindset often runs contrary to the Western entrepreneurial spirit. Why is partnering a must? Because the Chinese market privileges Chinese companies at every level. China wants its home-grown companies to be market leaders not just in China, but in the world at large. As such, most Western companies simply cannot enter the market without very strong partnerships with well-known Chinese brands that can lend some of their local power to the foreign brand. Along the way, the hope is that Chinese brands will benefit mutually from aligning with foreign brands in their own global expansion endeavors into the West.
The problem for Western companies? The very notion of “partnership” is different in China from in the West. In China, it’s more common to mix personal relationships with business. Most American companies hold their partners at arm’s length by comparison, viewing relationships with their partners in a much more transactional and shorter-term light. Some partners in the US even compete with each other to some degree, to the point that you could categorize some of these relationships as “frenemies.” In China, these relationships tend to be much deeper, and longer-term in nature.
Uber did seem to understand this to a degree. The company quickly developed a robust network of local drivers, and its investments in relationship-building there paid off. It would surely not have been able to make a strong deal with Didi otherwise.
But its error may have been that it focused too much on building relationships with individuals, instead of partnering with well-known brands from the beginning. While Uber did eventually partner with Baidu, Didi had far more prominent backers in Alibaba and Tencent. Selecting better partners and leaning into the partnership angle earlier on could have helped Uber see faster and stronger traction in China.
Other crucial allies to have on your side in China? The government. Here too, Uber made a strong effort. Uber CEO Travis Kalanick made many visits to China in order to build political relationships, courting public officials, even joking that he was spending so much time there he should apply for Chinese citizenship. But that effort would offer minimal payoff considering that Didi was already better protected by the China Investment Corporation (CIC), the nation’s sovereign wealth fund, as one of its important investors. Take note: when the Chinese government has invested in your competitor, to say that you have an uphill battle is a serious understatement.
4. Don’t expect quick ROI
The Chinese are famous for long-term strategic planning. And in China, “long-term” does not mean five years out, but decades out. It’s part of what differentiates their government, businesses, and indeed, their entire culture from most of the rest of the world. But it’s hard for many American companies to accept that they simply won’t be profitable in China for many years.
Long-term thinking doesn’t mean slow execution. China moves fast, and so does Uber. Uber went into China at its usual, highly aggressive pace, expanding from 10 cities to more than 60 in just 12 months. But alongside its breakneck expansion, Uber seemed to understand the importance in China of the long-term play. Uber CEO Kalanick seemed determined and unfazed about their significant losses there over two years.
What shareholders viewed as “bad signs” and a “slow start” in China were actually an important part of a longer-term play. Unfortunately, this kind of pressure from investors can really thwart a company’s chances of success in China and the goal of building a more valuable company over a longer period. In this case, even when the CEO appeared to understand the vast future potential.
Admittedly, one thing that worried investors about Uber’s strategy in China was that most of their losses were due to the fact that they heavily subsidized drivers in order to gain market share, a costly approach, but one that was working. This strategy got them from around 5% to 30% market share in a very short timeframe. Competing on price can be risky in any market, and very few Western companies have ever gained traction in the Chinese market using this strategy. So it’s no wonder this set off some alarm bells with investors.
The main lesson here is that foreign companies can’t rely on China for a significant amount of near-term growth. If anything, companies planning to expand into China should view it as a calculated risk. Don’t invest more than you can safely afford to lose, because the odds are stacked against Western companies, even when they do take a long-term view.
5. Have a back-up plan
If your company does go into China and realizes only too late that its chances of seeing ROI are minimal, you’ll need a back-up plan. How will you cut your losses? Uber did not back away from the market entirely, which would have indeed been a failure after making such a huge investment there.
If Uber had backed out, the market could have regarded such a move the same way it regards most of these scenarios — as proof of yet another arrogant and short-sighted Western company that simply didn’t have the foresight or the staying power to truly commit to the massive opportunity that China represents.
Many companies could take a lesson from Uber when they begin to see signs of failure in any new market. It’s always tempting to back away, but is that really the best use of the money, time, and organizational energy you’ve sunk into a new market? Uber saw an opportunity to stop the bleeding from the cost side while still coming out of it with an investment that may pay off handsomely in the long term. Indeed, far from a surrender, Uber’s stake in Didi could eventually become one of its most valuable assets.
6. Lose the “conquering” mentality
When Western companies view a foreign market as something to “conquer,” it’s nearly a sure-fire recipe for failure. What kind of customer wants to be dominated, let alone conquered by a brand? China, in particular, is not a place to be conquered, but rather, an important and highly complex culture, a major world economy that deserves significant respect from outsiders. Companies that aim to succeed there must embrace an attitude of humility, and leave their notions of Western superiority at the door.
Likewise, the ethnocentric “we’re #1” mindset needs to go as well. In a market as vast as China, it’s highly possible to succeed in a foreign market without being number one. Indeed, the Chinese market is so huge that even capturing a small slice of it can mean tremendous financial success. To succeed in China, Western companies need to focus less on beating local competitors and more on truly pleasing local customers.
7. Redefine success
Can a non-Chinese company succeed in China? Absolutely. But all companies expanding into China that want to actually succeed there would be well-advised consider what “success” in that market really means. It certainly can’t be defined in typical Western, winner-take-all terms. It requires a more collaborative mentality, and a much broader and longer-term mindset than what most Western companies are willing to adopt, given the investor pressures for short-term performance and their natural aversion to risk.
With a deal worth $7 billion now under its belt, what Uber has done in China is hardly a failure. If anything, it’s proof that the company learned a great deal from its Chinese expansion experience. Uber was willing to adapt and evolve in order to invest in a future with China, albeit differently than it does in most markets.
Or, to summarize it with an old Chinese proverb, “Retreat in order to advance (以退为进)”.
Such an important point to keep in mind: strategy and definition of success vary from market-to-market. The case of Uber certainly illustrates your conclusion well – it’s worth rethinking your country/regional strategy or falling back to an alternative strategy before giving up entirely.
Thanks Chris! So many lessons to learn from this. Often, companies go into a country not totally sure of what their exit will be. It’s good to remain flexible and acknowledge that not all markets are the same, for sure.