In this article, Jeffrey Towson discusses how and why 2016 will be different for the tug-of-war between Uber China and Didi.
In 2015, much of the well-publicised Uber China vs. Didi fight was about raising capital and subsidising rides. It was a money war. And a race to get to critical mass in drivers and riders. There was also a lot of discussion about the regulatory greyness in private rides in China.
In 2016, I believe the money war and the regulatory issues will continue. And the race for critical mass will increasingly take place in second and third tier cities.
However, I think three new factors will also emerge as increasingly important: product development, human capital and a “capacity to suffer”. In this, Uber China vs. Didi will be very different in 2016.
Looking Back at 2013-2015
Chinese transportation apps began as a fight for taxi-hailing. Back in 2013, that was really the only big market in China. And going for taxi-hailing avoided a confrontation with the State-owned taxi companies. Kuaidi and Didi won that round and then merged. Uber, by and large, sat it out.
2015, as mentioned, has mostly been about getting a critical mass in private ride sharing (people using their own cars). Private rides are the truly massive opportunity in China but this is still in a grey area legally. It is moving forward but we still regularly see offices being raided and drivers being arrested. Private rides are directly disruptive to the State-owned taxi companies, so this is a fairly tense situation. But both Didi and Uber are now going after this regardless.
The key in 2015 was to get to a critical mass in drivers and riders in each city. At a certain volume, your costs and wait time per ride drop and it becomes very difficult for new competitors to enter. The market consolidates and the leaders are protected by what economists refer to as two-sided network economics (think credit cards and app stores).
Both Didi and Uber China are both now going for critical mass, mostly by raising capital and using it to subsidise rides. They are buying volume. Hence, their much discussed $1.2B and $3B capital raises. And the large losses they have been taking.
2016 will be an operational marathon between those with critical mass. In this marathon, Didi and Uber will each begin offering more and more services. They will rapidly customise and re-customise their products for niche markets. They will do a flurry of partnerships and tie-ups with online and offline companies. And they will expand operationally across China, typically in sales, customer service and logistics.
[ms-protect-content id=”3162″]Watch over the next months for the following three factors:
1) Product development and tie-ups will become much more important. We are just at the beginning of Chinese transportation apps. In 2-3 years, this will be a bigger and more complicated business than just offering rides across town.
So competition is going to shift towards product development and tie-ups. Offering a nice ride service will not be enough. You will also need to tie this service in with communications (WeChat for example), with finance and banking (such as Alipay), with e-commerce, with government services (such as trains), with logistics and others. It will be a transportation ecosystem.
What the eventual winning ecosystem will be is not yet clear. But we can already see competition moving in this direction. For example, in October Didi began offering test drives for new cars (an e-commerce tie-in). As of January, they have already received 1.4M test drive requests. Expect lots more of these types of announcements – and especially tie-ups with Chinese e-commerce.
2) Operations and human capital will become much more important. Operational depth is also a big deal. Unlike sharing companies like Airbnb, transportation apps have a big operational component. For example, Uber actually has the majority of their US employees located in cities around the country, not in San Francisco. These employees are either in driver operations (i.e., tech intensive logistics) or community relations (i.e., coordinating and marketing to local populations of riders).
This type of operational depth will also be important in Chinese transportation apps. And, unfortunately, is a problem for Uber in China because they are way behind in this regard.
The crucial number for China is +4,000. That is Didi’s headcount today, which is way above Uber’s reported +200 staff in China. It is worth pointing out that Chinese technology companies now have something that most Western Internet companies do not – brainpower in huge quantities. For example, Huawei, the world’s leading telecommunications equipment company, has 170,000 employees. But over 70,000 of them are in research and development. The ability to deploy increasingly educated engineers in great quantities is a new capability emerging in China.
It is also worrisome that Uber apparently still has no China head. This seems insane. Although the situation is not that clear from the outside.
So to win in China, you will need a nationwide operating platform and an aggressive product development capability. That means brainpower. I think human capital will soon be a much bigger part of the story.
3) Didi may begin to try to kill off Uber China. There is an interesting point in new markets when the competitors run out of new customers to acquire and begin trying to take customers from each other. And taking a well-funded competitor’s customers (and drivers) while protecting your own is usually a lot more expensive.
So can Didi use its +80% marketshare to try to take Uber’s riders and drivers? Will they try to kill them off? And does their marketshare advantage (not a cash advantage) give them an ability to do that?
Didi has not done this yet. Probably because they are targeting new customers and services – and don’t see Uber as a big threat. But eventually they will run out of second and third tier cities to expand to. And at that point, they may turn their guns on Uber China. This will mean two things:
The current money war will get a lot more expensive. It will be about who is bigger, who has more capital and who is willing to lose the most money.
It will probably seriously hamper Uber’s ability to expand. It’s hard to go after 50 new cities when your core marketshare in Beijing and Shanghai is under attack. And while Uber China can probably match Didi in terms of capital today, I don’t think they have the manpower today to fight a war on two fronts in China.
This third point is really about whether these two giants are going to choose to co-exist or to fight it out. Coke and Pepsi co-exist and mostly avoid price wars (though they have had some in the past). As a result both have great profitability. But in other industries, the big players continually target each other and this usually results in one party dying or both parties not making any money.
This has a lot to do with a “capacity to suffer”, which matters in China. Winning in China (online and offline) is often about who is willing to suffer the most. Everyone spends building factories and capacity. Everyone lowers prices. And everyone bleeds cash. The winner is the one who is able and willing to bleed the longest.
A good example of this was the decade-long fight between ctrip and eLong (previously owned by Expedia). While both got to scale early in China and had large marketshare, they had an ongoing war that caused ongoing losses. In early 2015, after losing about $100M in each of the two previous quarters, Expedia had had enough. After a decade of effort, they sold their stake in eLong and went home.
My prediction is there won’t be any sort of happy co-existence in Chinese transportation apps. The Chinese Internet is a particularly ruthless market. Of course, one of the interesting quirks of the Uber China vs. Didi war is the family relationship between these companies. Jean Liu is the CEO of Didi. And Zhen Liu, the head of Strategy for Uber China, is her cousin.
Jean Liu, the president of Didi Kuaidi, answers a question at a news conference for the strategic partnership with China Merchants Bank in Beijing, China, January 26, 2016.
Photo Courtesy: REUTERS/Jason Lee
Going forward into 2016, I would watch for a flurry of product and tie-up announcements. And I would keep an eye on the operational scale of each company. My questions for Uber would be:
How are you going to get to 5,000 staff in China asap? And how are you going to match the speed of product, service and operational improvements that are going to be coming out of Didi?
Are you willing to lose money in China for the next 5-10 years? What is your ‘capacity to suffer’? Everyone here knows if you bleed the foreign company long enough most will give up and go home.
Featured Image: The result of a merger between two of the biggest transportation app companies in China, Didi Chuxing is Uber’s biggest rival in the Asian market.
Photo Courtesy: ZDNet.com
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About the Author
Jeffrey Towson is a Professor of Investment at Peking University Guanghua School of Management. He is the co-author of the #1 best seller The One Hour China Book.
