Foreign internet players in China: After Uber

Twelve months ago, Uber's boldness seemed boundless. The US-headquartered mobile ride-hailing app had thrown down the gauntlet to its Chinese rivals, raising $1.2 billion has been raised for a dedicated local unit and entering into agreements with a handful of domestic strategic players. "Simply stated, China is the No.1 priority for Uber's global team," CEO Travis Kalanick told investors.

The company insisted it would not join the long list of foreign internet companies - eBay, Amazon, Google, Groupon, Facebook and Twitter - that entered China in the 2000s only to thwarted by a combination of strong domestic rivals, regulatory obstacles and poorly conceived business models.

Now, though, Uber appears to have capitulated. Didi Chuxing, the domestic market leader in the ride-hailing space, will assume control of Uber China's assets, including its brand, operations and database, creating a combined entity said to be worth $35 billion. Uber's global parent will receive a 5.89% stake in the combined entity with prefered equity, which equates to a 17.7% economic interest in Didi.

The costly battle between the two companies that sees subsidies liberally handed out to drivers and passengers in order to build market share - which Kalanick said was costing the company $1 billion a year - will end. Investors in Didi and Uber China, some of whom previously played a role in the merger of Didi Dache and Kuaidi Dache to half the domestic cash-burning competition, are likely to be relieved.

To be fair, Uber made some headway in China, although perhaps not as much as it claimed. The company might have learned from the experiences of its predecessors that China cannot be a halfway bet - if you want to be in the market, time and resources must be allocated to it. Hence the creation of Uber China and Kalanick's personal commitment to the country (it is claimed he spent one in five days there in 2015).

However, the market dynamics have also changed since Google and the rest made their first forays. Between 2005 and 2015, China's internet penetration rose from 8.5% to 50% and the number of internet users grew six-fold to 649 million. Investors are only too willing to bet on these metrics, as evidenced by the $7.3 billion in debt and equity funding that Didi raised earlier this year. A ground war against a local incumbent is not easily won.

There may be further debate about the extent to which Uber localized its operation - the received wisdom is that global management should establish strong China teams and empower them to make decisions and tailor product offerings - and whether this would have made any difference in the battle with Didi. It could be argued that in areas like online-to-offline (O2O) services, taking on a large domestic rival with a similar product is a pointless endeavor.

The lesson for other companies, therefore, is to underline the differentiation that comes by virtue of being foreign. Airbnb, for example, which entered into a partnership last year with China Broadband Capital and Sequoia Capital to expand in China, can bring vacation rental properties to China's fast-growing base of outbound tourists. LinkedIn, meanwhile, has made local changes to its product, but a key selling point remains access to a professional network that stretches beyond China's borders.

This thinking is also becoming more prevalent in venture capital investments. The relevance of China is considered by many start-ups at a much earlier stage: Is the market worth addressing from a consumer or supplier perspective? Do we need a local partner or should we try it independently? What form should local partnerships take?

Uber probably won't be the last internet behemoth to take on China but technology companies are increasingly want to be global - provided their business model can accommodate it - from day one.

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