China: A tough nut to crack for Uber

Christopher S. Tang, UCLA Anderson School

September 9, 2015

In August 2015, Uber became the most valued startup company in the world with a valuation of $51 billion.  At the same time, Uber threatened taxi services in the United States and Europe, which triggered various protests in France, Germany and elsewhere.   Despite various disputes between Uber and various groups (local governments, taxi drivers, etc.), Uber is using a disruptive business model to challenge taxi monopolies in many countries. 

While Uber is embraced by many folks in the West, its business model may not work in China especially after two ride-hailing Chinse companies merged to form Didi-Kuadi (DK) (http://www.xiaojukeji.com/website/index.html).   On the surface, both Uber and DK are similar.  First, both companies rely on mobile technology to connect passengers with drivers.  Second, both Uber and DK are aiming for the huge market in China with 800 million urban people with transportation needs.  Third, both companies have strong financial backing in China:  Uber has strong backing from Baidu, and DK has a valuation of $15 billion with strong financial backing from Alibaba and Tencent.  Can Uber succeed in China? 

Upon further examination, there are some fundamental differences that give DK a competitive advantage that Uber will find it difficult to beat unless it changes its business model in China.   Here is why.

1. DK Combines Cooperation and Competition. While Uber aims to disrupt the taxi industry, DK cooperates with the taxi drivers by offering its mobile apps so that taxi drivers can use these apps as an additional channel to get more passengers.  At the same time, DK competes with taxi drivers by recruiting drivers to earn extra cash by using their own cars to give rides to passengers especially during peak hours.  By cooperating with the taxi drivers, DK can gain two competitive advantages: (a) DK can acquire a much larger pool of drivers. In 2015, DK has over 1 million private-car drivers, compared to Uber’s 100,000 drivers.  (b) DK can scale up its operations much faster.  In 2015, DK offered services in 80 cities, compared to Uber’s 16.   Consequently, it should not come as a surprise when Re/Code reported that, in July 2015, DK was giving 3 million rides a day in China, compared to Uber’s 1 million.  Also, according to the statistics reported by Caixin, DK enjoyed 80% market share, compare to Uber’s 11.5% (see figure below).
2. DK Meets Local Needs In China.  DK offers a wide range of services to meet the needs of many urban middle-class workers.  According to the statistics reported by Caixin, DK captures the growing middle-class professionals in China (see figure below).  First, to travel between home and office, many Chinese white collar professionals would need to take different types of overcrowded public transportations.  Because of the inconvenience, they either drive their own cars which can be expensive.  DK offers a new service called “Hitch” that enables these drivers to earn extra cash by giving rides to other workers who share the same route.  Second, heavy drinking after work is rather common in China.  To reduce drunk driving, DK offers a new service called “chauffeur service” that enables a customer to hire a chauffeur to pick him up and then drive him home in his own car.  Third, to provide the convenience of a large group of people to attend social events or business meetings in China, DK offers “bus” services by enable tour bus drivers to earn extra income.  

 

To retain good drivers, both Uber and DK are offering bonuses to those who completed a high number of rides.  At the same time, both companies are competing for new drivers to keep the rider’s waiting time low.   This competition will continue. At the same time, DK may be in discussion with Alibaba about the idea of using their drivers to make home deliveries for its Tmall online customers.  Ultimately, DK’s business model in China is more comprehensive, and Uber will find it difficult to beat!