Aug 5, 2016 @ 06:13 AM
By Dr. Edward Tse and Bill Russo

Disrupting The Disruptors: The Merger Of Uber China And Didi Chuxing

On August 1st, Didi Chuxing and Uber China announced a plan to merge their businesses in China, effectively putting Didi in control of their combined ride-hailing business for the China market. The deal has attracted a great deal of attention since the announcement and a number of critical questions have been raised. We would like to share our perspective on some of these questions.

What does the merger mean to anti-trust?
While the China government is typically very actively involved in industrial policy and development, they have actually resisted getting in front of developments related to mobility services. This is mainly resulting from the very favorable public response and popularity of these services. Ride-hailing, or On-Demand Mobility (ODM), services address “pain points” associated with the expanding demand for mobility in an increasingly urbanized China, and are empowering both users and drivers. Services such as Didi Chuxing, Yidao, UCar, and Uber China have until now gone unregulated. New draft regulations have recently been circulated, but this is notably after the emergence of the services and there’s been no attempt to curtail them in any way.
Can foreign tech companies compete in China?
Of course they can, but it won’t be easy. Tech companies such as Apple AAPL +1.49% have had success in China, but foreign companies must be prepared to adapt their approach to the China context. The usual cause for failure is when the companies are either unaware of the local context or unwilling to seriously consider it. Unlike traditional manufactured products, Chinese tech players – especially the tech giants like Baidu BIDU +3.05%, Alibaba and Tencent (BAT) and their ecosystem partners – are very well embraced by Chinese consumers. This success comes not as a result of favored treatment by the government, but rather from their ability to tailor solutions that are relevant to the “pain points” experienced in the market. This is certainly the case for the mobility solutions players. Didi has over 85% share because they simply were faster and smarter at delivering a solution to the market than other local and foreign competitors – not because they were given any favorable treatment by the government or by policies (which, as noted earlier, did not exist in the early stage of development).

If foreign companies want to join the game, they need to think and act like the entrepreneurial Chinese companies like Didi who are rapidly emerging and growing exponentially. They must learn to compete in or cooperate with the BAT ecosystem players or other tech companies who are often open to local or global collaborations with foreign tech firms.

Did Uber China win or lose? Could Uber China ever become the dominant player in the country if it decided to press ahead?
Win or Lose is a judgment call. We think they both get something which they can call a win. Didi has more than 85% share of China’s ride-hailing market and over 7,000 employees. Uber could not possibly match that without enormous investment and heavy discounting. The merger was a way forward that at least makes Uber Technologies a large shareholder of Didi. They have a seat at the table and can collaborate with Didi locally and globally.

Internet companies can make as much or more money from licensing IP as they can from being the brand that commercializes the technology. Uber gets a big share of a huge Chinese start-up that will go up in value and now has the option of licensing them advanced technology for transportation systems. In return, Didi gets a global mobility solutions partner that can help them expand internationally. Didi is also well positioned as the mobility company that can commercialize offline services related to mobility (because they have access to a digital ecosystem from their BAT partners, which Uber lacks in China).

What does the merger mean to anti-trust?
It depends on the how the boundary of the relevant market is defined. In terms of the ride-hailing service market, Didi is the dominant player. But if we are talking about the broader transportation market (which also includes bus, metro, train, etc.), Didi is not dominant. Looking back to 2009, China’s Ministry of Commerce rejected Coca-Cola ’s acquisition of Huiyuan, a Chinese juice-maker, stating that the deal would give Coca-Cola a dominant position in the market. Coca-Cola argued, unsuccessfully, that the position would not be as dominant when contrasted with the larger FMCG beverages market. Clearly, every case is different and up till now, it is unclear how the Ministry will view the Didi-Uber case.

What will this deal mean to Uber and Didi’s global strategies?
So far, the focus of this transaction is on China, but it is interesting to consider how Didi and Uber’s strategies will be impacted elsewhere. Didi and Uber could expand their collaboration and become a global ODM services partnership, where each offers branded services for specific regional markets, with Didi dominating China and Asia and Uber leading in the US and Europe.

They may also choose to leverage complementary capabilities from each party where Uber focuses on advanced transportation technologies and development of algorithms for movement of people and things, while Didi delivers the actual mobility service to the consumer. Apple’s recent US$1Bn investment in Didi also raises an interesting question of what role they may eventually play in this alliance.

In any case, both companies can now better focus their resources in building a profitable business in their respective markets. Didi can work to cement its dominant position domestically in a bid to further distance itself from other local rivals in China. Uber can now invest in expanding its own services, while pivoting from low-end ride-hailing to more sophisticated transportation and perhaps building out its autonomous transportation capabilities. It is clear that other companies will start feeling the heat, especially Lyft in the US, should Uber decide to redouble its efforts on its home turf.

The global implications of the relationship remain to be seen, especially among the stakeholders of the respective companies. This raises the core question: how will this rapidly evolving landscape of partnerships reshape the future of mobility? And for sure, we can look forward to even more exciting developments in the future.

About the Authors:
Dr. Edward Tse is founder & CEO, Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. A pioneer in China’s management consulting profession, he led the Greater China operations for two major international management consulting firms for 20 years and is widely known as China’s leading global business strategist. He is author of The China Strategy (2010) and China’s Disruptors (2015).
Bill Russo, Managing Director and Auto Practice Leader at Gao Feng Advisory Company.