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Didi and Uber China merger underscores the complexities of Western companies doing business in China

August 02, 2016


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The Chinese car-hailing app Didi Chuxing has confirmed the acquisition of Uber’s Chinese business unit. The two companies will still retain distinct brands. Uber China will be given a 5.89 percent stake in the new entity. 

Our analysis:

Chinese government releases new rules to regulate online car-hailing industry 

The Chinese government released the new regulations to make the online car-hailing industry legal from November 2016. The new regulations include:

  • The government will support the online car-hailing services to minimise the air pollution and encourage the development of sharing economy.
  • Drivers must have more than 3 years’ experience of driving, without being reported as drunk driving.
  • Online car-hailing companies must provide drivers’ information to customers, as well as build rating systems to supervise and improve the service quality.
  • Online car-hailing companies cannot share user information and data with any other third parties for other business purposes. 
  • In addition to the basic guidelines, joint-international car-hailing companies will also be examined by the international investment regulations.

The government’s support is the key to ensuring the success of emerging business in China. Didi has been known as the government-backed online car-hailing business, as China Investment Corporation and China Merchants Bank invested $2 bn and $2.5 bn in Didi respectively from 2015 to 2016. Apart from the financial support to Didi, the release of the new regulations shows the Chinese government’s positive attitude towards online car-hailing business.

However, there are always more regulations for joint-international businesses to comply with when compared to local businesses in China. Therefore, Uber would have faced more challenges on its own. Uber’s decision to sell its Chinese business to rival Didi highlights the significance of partnering with local players to secure the position in the Chinese market.  This suggests implications for other western companies struggling in China: securing the position in the Chinese market is more important than beating the competition.

Uber now owns part of Lyft, awkward.

The merger between Didi and Uber China will see Uber own a 20% stake in Didi, while in return Didi will invest $1 billion in Uber. The deals is also made complicated by Didi’s other affiliates and investments. Didi has previously invested $100 million in US-based ride-sharing service Lyft, which means Uber will soon be a partial owner of its US rival. Google, an early investor in Uber, will also now own part of Didi.

The intricate funding relationship between ride-sharing services and their investors highlights just how complex the ride-sharing market is and how eager investors are placing huge bets to capitalize on the ride-sharing craze. 

The Didi/Uber merger underscores the challenges Western companies face in breaking into the Chinese market

China is a lucrative but challenging market given its complex distribution, marketing and billing system, on top of the perplexing regulation and cultural issues. As such, many Western companies like Uber have faced several uphill challenges in the tough mobile services market in China.

China’s mobile services market is unique in that several large Western internet and mobile players have opted not to do business in mainland China due to regulatory and privacy concerns. Google and Facebook for instance, do not offer services in China. Without Google’s Play store and Facebook’s social network, several local app stores and social networks have sprung up in Google and Facebook’s absence – these include Qihoo 360, Baidu, Wandoujia, Xiaomi Miui App Store, China Mobile, and Sina Weibo.

The lack of Western mobile players and ecosystems in China has paved the way for OEM companies like Lenovo, Huawei, Xiaomi and content and services companies such as Tencent, Alibaba, and Baidu to gain a strong position in China’s mobile services market.

Chinese companies have also proven to be astute business players. Many Chinese firms have made good strategic bets by offering services that fit domestic tastes. However, many Chinese companies are now working to expand their services internationally. Companies such as Xiaomi have broken into additional markets like India and a Chinese consortium made up of Qihoo 360 and Kunlun acquired Norwegian internet firm Opera for $1.2 billion in February 2016, highlighting Chinese companies’ ambitions to expand internationally. 

Geography
China
Research by Market
Mobile & Telecom
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