With nearly 1.4 billion people, China is a truly massive market for goods and services. It is no surprise that foreign companies have been trying to gain a foothold since China first began opening up in the late 1970s. Some foreign companies have been very successful in China despite some minor hiccups. For example, you can go to Wal-Mart in Guangzhou and buy Pringles (Kellogg), Oreos (Kraft Foods) and Crest toothpaste (Proctor & Gamble). ((See, Saabira Chaudhuri, Kellogg in Deal to Expand Snack Business in China, The Wall Street Journal (Sept. 24, 2012), http://www.wsj.com/articles/SB10000872396390444358804578015981900817500?mg=id-wsj; Robert Smith, Rethinking the Oreo for Chinese Consumers, Planet Money (Jan. 27, 2012), http://www.npr.org/sections/money/2012/01/27/145918343/rethinking-the-oreo-for-chinese-consumers; Crest is Fined Nearly $1 Million in China, The New York Times (Mar. 10, 2015, http://www.nytimes.com/2015/03/11/business/international/crest-is-fined-nearly-1-million-in-china.html.)). Others have not been so lucky. A recent example is the price war between two ride-hailing startups, US-based Uber and Chinese Didi Chuxing, which recently ended in a merger.
Even before Uber arrived on the scene, there had been a history of hostile price wars in the ride-hailing space in China. Uber China’s main rival, Didi Chuxing (formerly Didi Kuaidi), was itself formed through a merger.((Liyan Chen, Meet Uber’s Mortal Enemy: How Didi Kuaidi Defends China’s Home Turf, Forbes (Sept. 23, 2015), http://www.forbes.com/sites/liyanchen/2015/09/23/meet-ubers-mortal-enemy-how-didi-kuaidi-defends-chinas-home-turf/#67655e06fec9.)). Prior to the merger, two domestic Chinese ride-hailing services, Didi Dache and Kuaidi Dache were engaged in a price war for market share. In order to get more drivers and rides than the competitor, each company would subsidize its rides so that the cost to the consumer was low, but the drivers would still receive an attractive payment for their service. ((Id.)) During this time, Uber began launching tests in China. ((Leslie Hook, Uber’s Battle for China, FT Weekend Magazine (Jun. 2016), https://ig.ft.com/sites/uber-in-china/ )). As both Didi Dache and Kuaidi Dache hemorrhaged money through this process and Uber’s continued entrance into the China market loomed, they ultimately decided that it would be more advantageous to merge, which they did in February of 2015. ((Chen, supra)).
Meanwhile, Uber founder Travis Kalanick had made it his focus to gain a foothold in the Chinese market with Uber China. In February of 2014 he set out to achieve this goal, launching Uber China in Beijing. ((Hook, supra)). Uber China had some success and was able, over the course of about a year, to become active in 40-60 different cities around China. Affecting its growth and operation however was a question regarding the legality of ride-hailing apps. For example, both Uber and Didi drivers were stopped and hassled seemingly at random (and sometimes with passengers) because the regulations about ride-hailing were unclear. ((Id.)). This confusion of law made it difficult for even officers of the ride-hailing start-ups to accurately predict the legal landscape surrounding ride-hailing apps in China. For example, Liu Zhen, Uber China’s head of strategy and government relations, was quoted as saying “There are a lot of grey areas … I wouldn’t say that it is not legal, it is in the process of being legalized.” ((Id.)).
Against this backdrop of legal uncertainty, Uber China was attempted to wrestle market share away from a domestic startup with strong backing from tech investors both in China and abroad. ((Didi Chuxing’s investors include Chinese tech giants Alibaba and Tencent and Apple. See, Tracey Lien, Paresh Dave, and Julie Makinen, Uber China to join rival Didi Chuxing in $35-billion deal, Los Angeles Times (Aug. 1, 2016), http://www.latimes.com/business/technology/la-fi-tn-uber-didi-20160731-snap-story.html.)). The showdown quickly devolved into a subsidy war in the same way it had between Didi Dache and Kuaidi Dache just over a year earlier. Both Uber China and Didi Chuxing heavily subsidized rides, leading to massive losses for the companies, with Uber losing over $1 billion in the first two quarters of 2016 alone. ((Uber Reportedly Lost More Than $1 Billion Over the First Half of 2016, Fortune (Aug. 25, 2016), http://fortune.com/2016/08/25/uber-billion-loss-2016/)). To sustain these massive losses, both firms needed additional investment. Uber announced first in June of 2016 an influx of $3.5 billion from the Saudi Sovereign Wealth Fund. ((Alex Konrad, Uber Raises $3.5 Billion From Saudi Wealth Fund, Keeps $62.5 Billion Valuation, Forbes (Jun. 1, 2016), http://www.forbes.com/sites/alexkonrad/2016/06/01/uber-raises-3-5-billion-from-saudi-sovereign-fund-at-62-5-billion-valuation/#43925c4b41d4.)) Unfortunately for Uber, this announcement was followed shortly by one from Didi Chuxing announcing over $7bn in additional investment from multiple investors, including Apple. ((Juro Osawa and Rick Carew, Didi Chuxing, China’s Rival to Uber, Scores $7 Billion in New Funding, The Wall Street Journal (Jun. 15, 2016) http://www.wsj.com/articles/chinas-uber-rival-didi-drives-off-with-7-billion-in-equity-debt-funding-1465985225.))
Faced with this fresh round of investment for Didi Chuxing and its massive losses, Uber more or less admitted defeat and agreed to merge its China business with its adversary. ((Bill Russo, Disrupting the Disruptors: The Merger of China and Didi Chuxing, Forbes (Aug. 5, 2016), http://www.forbes.com/sites/brusso/2016/08/05/uberchinaanddidichuxing/#5c106fcc2a22)). In the days ahead of the announcement of the Uber-Didi merger, Chinese regulators made a significant announcement the legality of ride-hailing apps. ((Zheping Huang, China finally made ride-hailing legal, in a way that destroy Uber’s business model, Quartz (Jul. 29, 2016), http://qz.com/745337/china-finally-made-ride-hailing-legal-in-a-way-that-could-destroy-ubers-business-model/)). The regulation contained a number of requirements for vehicles and drivers offering rides through ride-hailing apps, but primarily it resolved the uncertainties around the industry. ((Id.)) This approval should place the newly-formed entity in a strong position, with very little competition and no more uncertainty regarding its legality, which should translate into greater use of ride-hailing apps.
Stay tuned for the second part of this series, which will explore the merger agreement reached between Uber China and Didi Chuxing as well as the forthcoming antitrust investigation of the Chinese regulators. ((Paul Mozur, China Opens Antitrust Investigation Into Uber’s Deal With Didi, The New York Times (Sept. 2, 2016), http://www.nytimes.com/2016/09/03/business/china-uber-didi-chuxing.html.))
Latest posts by Thomas Canny (see all)
- Legal and Practical Effects of the South China Sea Arbitration Award (Part II of II) - April 4, 2017
- Legal and Practical Effects of the South China Sea Arbitration Award (Part I of II) - April 2, 2017
- Uber in China, Part 2 of 2 - January 22, 2017