November 21, 2016

November 21, 2016 | Commentary on Economic Freedom, China

Uber Forced out of China

Earlier this week, ride-boking giant Uber sold its Chinese operations to China’s ride-booking service Didi Chuxing. Didi will acquire all of Uber’s China’s operations.

In only seven years, U.S.-based Uber has become an enormous commercial and global success. It is the most funded start-up company of all time. At $62.5 billion, the private car-sharing firm is now potentially worth more than the stock market capitalizations of automakers BMW, GM, and Honda — despite never recording a profit. It recently received a capital infusion of $3.5 billion from Saudi Arabia’s sovereign wealth fund.

If Uber had become a commercial success in China, Chinese authorities ultimately would have clamped down to protect their domestic competitors.
And its growth has been phenomenal. In June, Uber entered its 467th city: Accra, Ghana. It now operates in 68 countries. China, however, is no longer one of them.

The Chinese market fundamentals seemed an ideal location for expanding Uber. The greatest urbanization in human history has created a traffic grid that was inadequate to keep pace with local vehicle demand.

Yet Uber has now gone down the trail of U.S. technology companies that have, in the words of Uber’s CEO Travis Kalanick, “failed to crack the code” in China.
 
Twitter and Facebook have been blocked by the infamous Chinese "firewall" for some time. Google Maps, which drivers rely upon constantly to steer them from pickup to drop off, was also blocked. Ultimately, Google — the largest Internet search engine in the world — decided to leave because of increasing censorship and the equally problematic problem of hacking into certain members' email.

Yahoo, eBay, Microsoft, Qualcomm, and even Apple have had problems. Foreign IT firms that do occasionally find success often face headwinds from Chinese regulators who limit their access to the domestic market.

Too be fair, Uber's exit was not entirely political. Both the strategy of Uber and Didi in China required heavy subsidies to both riders and drivers, and that strategy was costing Uber $1 billion a year. Didi naturally had state-backed funding, receiving a significant cash infusion from China's large sovereign-wealth fund.

Unlike others, Uber's exit was relatively benign. Uber and Didi will form an alliance that gives each company seats on each other's board of directors. Investors in Uber China will gain a 20 percent equity share in Didi. This would value Uber's current stake in Didi at $7 billion. Uber will also receive a 17.7 percent share of future profits.

Uber's strategy in China was unlike any country in which it had operations. In addition to getting support from global Uber, "Uber China" sought local investors. The hope was that, with local investors, the Chinese operation would be spared some of the hamstringing restrictions typically imposed on foreign businesses.

 Unfortunately, Uber ignored the direction the business environment has been moving in China. The Heritage Foundation's 2016 Index of Economic Freedom, ranks China an abysmal 140th worldwide in the protection of property rights and 152nd in investment freedom. Both the U.S. and European Chambers of Commerce have noted in recent years a marked deterioration in the ease of doing business.

In reality, it was smart for Uber to exit China sooner rather than later. (Indeed, it should have never entered in the first place with its equity stake unprotected.) It's tough to run a competitive business when their drivers were often questioned extensively at "checkpoints" when carrying foreign passengers. And there's little reason to doubt that, if Uber had become a commercial success in China, Chinese authorities ultimately would have clamped down to protect their domestic competitors.

In pulling up stakes, Uber has acted wisely. They've cut their losses. At the end of the day, however, the ultimate loser is the ordinary Chinese consumer.

- A former chief economist for Ernst & Young, William T. Wilson is a senior research fellow in The Heritage Foundation's Asian Studies Center.

About the Author

William T. Wilson, Ph.D. Senior Research Fellow
Asian Studies Center

Related Issues: Economic Freedom, China

This piece originally appeared in LifeZette.