Foreign internet companies find Chinese market hard to crack

In a recent move, Uber decided to end its lone fight in China, and merge its China unit with its bitter rival Didi Chuxing, a Beijing-based transportation network company, after investing about 2 billion U.S. dollars in the market in less than two years.

"Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there," said Travis Kalanick, CEO and Co-Founder of Uber on the company's official website.

Though hailed as one of the world's most valuable startups, Uber, the San Francisco-headquarted American multinational online transportation network company, had trouble developing business in China, the world's largest car-sharing market.

In less than two years, Uber won 17 percent of the Chinese market share, while Didi Chuxing controlled 70 percent of the local market.

By this merge, investors in UberChina unit will own 20 percent of Didi; while Didi will invest 1 billion dollars in Uber.

"This is a win-win situation," says Li Xiaoxi, Portfolio Manager at Principal Global Investors Funds. "Merger could be the best option for Uber to advance in and benefit from the Chinese market."

Uber is not the first western internet company not to succeed in China. Yahoo had attempted to enter China and it was unsuccessful, eBay did the same, and there's also WhatsApp. Popular as they are at home, when playing away game in China, most of these companies are dwarfed by their Chinese rivals.

Why foreign startups can't crack the Chinese market? The reasons behind this phenomenon are complex.

"China is a very difficult market for western companies to penetrate," says Robert Salomon, Associate Professor at the NYU Stern School of Business. "It is especially difficult for western technology companies."

Uber did a pretty good job in China actually. It had made headway into quite a few Chinese cities, including some third-tier ones. The localisation effort was easily seen. It had become partners with Baidu, and AliPay. Still, it couldn't avoid bloodshed in its competition with Chinese ride-hailing smartphone apps.

"The customers are very very different," says Salomon. "They have different cultural tastes and preferences, and the way to consume the products, the products they want are not the same with the products western consumers want."

For instance, Uber has always partnered with private cars, while when its rival Didi first came into market, it built a platform among taxi drivers. Although in first-tier cities, Uber represents cool and fashion, most Chinese people have more trust in cabs, which are under heavier scrutiny from the regulators.

Also, among the services Didi provides is "designated driving", which puts drivers on the network for those who have to take their car home after drinking. It has advertisement in a lot of restaurants and has got really popular. Local companies in China are familiar with these codes and can easily take advantage of that, making themselves handier than their western rivals, says Henry Huang, Associate Professor of Yeshiva University's business school, located in New York.

"They don't know China's market culture, consumer behaviour, regulations. Therefore, they cannot play the China market to their strength," says Huang.

Unlike Apple, the technology this ride-hailing company uses is pretty simple to copy. And Uber doesn't have the first-comer advantage, it entered China after Didi got popular among riders. That gives Uber more disadvantages in its battle against its Chinese rivals.

"So you have cultural differences, you have economic differences, regulatory differences, not to mention legal differences, all of these things make the Chinese market so difficult for western companies, especially those coming from the United States to succeed," says Salomon.

To a certain extent, it is a two-way street. When Chinese technology companies try to march on to the international market, they too are frustrated due to cultural and legal differences. But domestically, the improvements and modifications they have made to cater to the Chinese customers are indeed striking and eye-catching.

Didi is just one example. Among others there is WeChat, a messaging app used by almost everyone with a smartphone in China. It has now become an all-powerful app covering many aspects of Chinese people's daily life other than chitchatting, for example sharing moments of their lives, reading, paying phone or electricity bills, and money transfer, etc.

"Innovation is not necessarily making something from scratch," says Li Shanquan, Portfolio Manager of Oppenheimer Funds in New York. "We can also improve and innovate on a certain basis, making the product more suitable for the market."

"I think the Chinese competitors have reached a certain level now where they become competitive on a global stage," says Salomon. "Facing the most technologically advanced foreign competitors will allow local Chinese companies or force them in some way to improve by having to compete with those technologically advanced foreign competitors." Endit