August 23, 2016 / 2:01 PM / a year ago

Commentary: What investors can learn from Uber’s bumpy ride in China

A warning from a travel guide has stayed with me since I started working in Asia 25 years ago. Don’t ever get in a fight in Thailand, where kickboxing is the national sport, the author advised, because locals jumping into the fray don’t care who’s right, they care who’s Thai. I’ve often thought that a white-collar version of that advice would be good for westerners thinking about doing business in mainland China.

Uber’s experience since swaggering into Shanghai three years ago is the latest example of a western fight picker who didn’t understand the real odds. How and why investors let Uber chief executive officer Travis Kalanick burn as much money as he did – $2 billion according to most accounts – trying to enter a market in which Uber had no realistic chance of being successful just goes to show the sociopathic willingness of venture capitalists to place 100:1 bets with other people’s money in the hope of a large personal gain.

The financial upshot of Uber’s time in China seems to have been the transfer of much of these billions from investors to China’s Uber drivers, who were paid up to three times the going wage in some markets. That’s a lot of hong baos, especially since some of the rides they claim to have delivered seem to have been faked.

News earlier this month that Uber is backing out of the brawl it started with market leader Didi Chuxing isn’t surprising given how the locals supported Didi. But don’t be surprised, either, if the brawl hasn’t really ended and the deal announced worsens for Uber before it closes – if it closes at all.

Didi’s Chinese investors include Tencent, which owns messaging and calling app WeChat, and Alibaba, which owns online retailing giant Taobao. Didi founder Cheng Wei said in a speech last year that Tencent founder Pony Ma told him to “annihilate” Kalanick – one supposes figuratively – and Alibaba’s founder Jack Ma told him that “imperialism is a paper tiger, so just drag it out a couple years and [Kalanick] will run into problems himself.” Tencent and Taobao appear to have done more than just provide encouragement, though.

In a fund-raising memo last year, Kalanick noted that Tencent “blocked” Uber China’s WeChat accounts, cutting off a powerful mainland marketing tool. Tencent, which invested in Uber competitor Lyft ten days before the blocking began, claimed Uber violated its terms of service by using WeChat for “malicious marketing,” whatever that means. Uber denied that claim.

On Taobao, scammers sold modified smartphones and programs that faked driver and customer accounts for both Didi and Uber, allowing drivers to book and pay for fake rides and collect the larger subsidies. Taobao, which claims to have zero tolerance for fakes, seemed less hurried to delete fake accounts for Uber than for Didi.

Kalanick also complained to investors that “Taxi drivers have been paid to stage protests and forged text messages have been sent to our Driver Partners stating that Uber China is ceasing operations.”

If any of these sound like cases for the courts, you must be new to town. The odds of a western firm finding relief against a local company in China’s legal system are about the same as succeeding in the country’s tech market, which we’ll come to momentarily.

“Competition in China works differently,” Kalanick said in October. “As a Western company, these are the types of things you have to get used to.”

That sounds like a caveman seeing fire for the first time, even though American companies have been trying to navigate China under the communist party since Boeing and Coca-Cola signed deals in the 1970s. U.S. tech companies have experienced a constant battering there for over two decades. You don’t “get used” to these things. The only way to not have this happen to you in mainland China is to not try to do business there in the first place.

The likely last straw for Uber was the publication in July of new national regulations on ride-hailing apps which, while legalizing them, made it illegal to provide rides below cost, which had been the effect of paying drivers more than the fares. In other words, Uber had to stop what was essentially “dumping.” So did Didi, but with its much greater scale it could effectively price Uber out of existence because it would be difficult for Uber to legally match Didi’s lower price for the commodity of a car ride.

Imagine that – a Chinese regulator making dumping illegal. It is a great outcome for Beijing. In a stroke, it stopped the price war, guaranteed Uber’s failure and, maybe, Didi’s survival, and lifted the economics of the existing taxi industry, entrenched local cartels in many cities where drivers also joined the fight against Uber – at times literally.

Western tech companies have had a rough go on the mainland. Google, Amazon and eBay effectively quit the market. IBM, Qualcomm and Cisco are all facing sales declines and increased scrutiny from the government. So is Microsoft, which has suffered from rampant piracy of its products for 20 years. Apple’s iBooks and iTunes Movies stores were shut off in April. And Facebook and Twitter can’t even get in.

Now that Uber is the certified “loser” of the price war, don’t be surprised if the deal never closes, or if it closes on terms worse for Uber’s investors than announced. China’s antitrust regulator, which said last week that the companies had not yet applied for permission to merge, could kill the deal, which would put a weakened Uber back in a cash burning solo operation instead of a face- and cash-saving merger with Didi. After Western regulators turned down a string of Chinese deals – partly for national security – Beijing might derive some satisfaction from lopping off the head of the Uber trophy instead of saving it.

Didi could also find various excuses to re-trade the deal, asking for late concessions or other modifications from Uber, something that might be hard for the now-vanquished company to refuse. With anti-West feeling building lately over steel- and other dumping cases, the recent decision against Beijing of the Permanent Court of Arbitration on the South China Sea issue, and Donald Trump’s anti-China comments, among other things, this kind of tit-for-tat wouldn’t be surprising.

And, of course, there’s the issue of the sky-high valuations of these businesses in the first place, which means Uber’s share of Didi may not amount to what is hoped today. Uber’s recent $60 billion-plus valuation assumed total world dominance. China now shows that’s not going to happen.

Didi’s Cheng was described by one of his investors as someone with “wild toughness” or “rule of the jungle mentality.” With a little help from his friends, he seems to have won the ride-sharing brawl in China.

(Robert Boxwell is director of Opera Advisors, a management consulting firm based in Kuala Lumpur.)

The views expressed in this article are not those of Reuters News.

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