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Business Impact

With Its Sale in China, Uber Drives a Better Bargain

After losing billions trying to make it in the tough Chinese market, the ride-hailing app pioneer is shifting some spending into technology.

Today Uber looks smart. The ride-hailing app put an end to its incredibly expensive China marketing experiment, selling Uber China to rival and local giant Didi Chuxing. In return for raising the white flag, Uber gets to stop spending billions to incentivize riders and drivers to use its money-losing service. It also gets a sizeable stake in the combined companies, and its CEO Travis Kalanick reportedly gets a seat on the board.

But was China a one-off exception, a market so difficult for an outside technology company to penetrate successfully that even Google ended up pulling out? Or was Uber’s China experience evidence of a bigger weakness in Uber’s technology and business model?

Anthony Tan, CEO of Grab, an Uber competitor in Southeast Asia, quickly declared it to be the latter. In an e-mail to employees obtained by TechCrunch, Tan says that the China deal is proof “that when the local champion stays true to their beliefs and strengths, they can prevail.” Uber, Tan writes, has “lost once, and we will make them lose again.”

In China, Uber struggled to establish loyalty with either customers or drivers. After years of offering discounts to passengers and incentive payments to drivers, both groups had grown to see price as the only thing that mattered. Once-lauded aspects of the app platform technology, such as the chance to offer feedback on drivers and customers, and develop ratings of both groups, proved much less valuable than a cheap fare.

This is a problem since both users and drivers can easily sign up to multiple apps, and shift from one to the other. Harvard Business School professor Matthew Rhodes-Kropf predicts that soon there will be a kind of Expedia for ride-sharing apps, on which price will be the comparative factor.

“The basic business is a commodity business,” says Rhodes-Kropf.

The idea of first-mover advantage, that Uber should expand quickly to become a global number one and reap the benefits of size, has been a driver of venture capital investment in the company. But as successful rivals like Didi Chuxing, Grab, and India’s Ola have shown, this industry has become increasingly fragmented and local. 

Even in the U.S., ride-hailing apps have yet to reach widespread adoption. Only 15 percent of Americans have ever used a ride-hailing app, and those users are largely concentrated in a limited number of urban areas. 

Freed from pouring money into wooing Chinese customers, Uber may now be able to focus on building a more significant technological advantage. The company has an interest in autonomous cars, and it was recently reported that Uber will be investing $500 million in a global mapping project.

Trying to develop a technological edge may prove a smarter investment than discounts for Chinese customers. But any financial payoff will be years away.

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