WeChat blocks Uber. And this is only the beginning.
Didi Kuaidi is using Uber’s playbook... against Uber
Remember when I wrote -- repeatedly-- that there was absolutely zero chance Uber could win China?
That mega competitor Didi Kuaidi simply had too much of a lead and the only way Uber could make a dent in it was unsustainable subsidies -- even for a company with $7 billion in capital raised? And that even if Uber chooses to lose $1 billion a year in China in subsidies -- which it has admitted to investors it will -- it still wouldn’t have a chance because Didi is backed by three of the biggest Asian corporates Tencent, Alibaba, and Softbank?
Softbank, remember, is also funding Uber rivals in India and Singapore, and Alibaba is also funding Lyft, and hence both have extra financial incentive to see Uber wounded in what will no doubt be the world’s largest ride sharing market.
And remember when I said that even if Uber was willing to run off a financial cliff in China, and could somehow become the dominant player, the country itself would never allow Uber to win because China is not going to let a US company with ties to the state department control its major urban transportation grids?
Yeah, guess what...
Back in March, WeChat banned Uber, a significant channel for how Uber communicates with customers. WeChat, the country’s dominant messaging app where consumers get deals and coupons from major digital vendors. WeChat, which is owned by Tencent.
Uber’s payments provider in China? Alipay, owned by Alibaba. Didi Kuaidi is the result of the merger of the Alibaba-backed and the Tencent-backed ridesharing entrants, and it’s worth noting that before these two giants combined forces, they pulled this kind of stuff with each other all the time. Kinda like the fights Twitter and Facebook had over sharing Instagram photos or Google shoving Google+ into all of its products at the expense of other commenting and social platforms. Only, the battle in China has far bigger financial consequences for everyone involved.
Uber addressed the issue yesterday, with SVC for business, Emil Michael, complaining to Bloomberg about Tencent’s anti-competitive behavior. Uber’s account is one that resonates with American readers coming new to this story: Poor American company blocked by big bad communist China. Won’t someone think of freedom?
Let’s leave aside for a moment the morality of these Chinese companies playing hardball. A child should have been able to see this was going to happen. What has always made Didi’s market position just so powerful is who was backing it. Chinese business culture is all about extreme loyalty within a circle and hardball tactics outside of that circle.
Now to the “oh poor American Uber” bit: Let’s not pretend for a second that Uber wouldn’t have leaned on investors to do the exact same thing if the position were reversed. What Uber is pissed about is that it’s been Ubered.
Remember, it was Uber who tried to use its leverage with would-be investors to block its American rival Lyft from raising money here. It was Uber who hired an elaborate army of secret agents to take Lyfts around major cities and use any tactic it could to get the drivers to switch to Uber, while ordering and cancelling Lyft rides to clog up the competitor's system.
An investigation by The Verge detailed the scheme, codenamed “SLOG”:
The special ongoing project had a different codename: SLOG. Contractors in New York who responded to the "special ongoing project" message were invited to individual hour-long meetings with Uber marketing managers, who had traveled from Los Angeles and Washington, DC, to New York to oversee the team’s creation.
It was there that the company laid out its plan, according to a contractor. With Lyft’s arrival in New York imminent, Uber said it was creating a "street team" charged with gathering intelligence about Lyft’s launch plans and recruiting their drivers to Uber. Contractors were then handed two Uber-branded iPhones and a series of valid credit card numbers to be used for creating dummy Lyft accounts. Uber assumed every contractor would be caught by Lyft eventually; the second phone, according to a contractor interviewed by The Verge, was issued so "you would have a backup phone if and when that happened so you wouldn’t have to go back."
A follow-up email outlined the process for recruiting Lyft drivers in detail. It emphasizes the importance of requesting rides from different physical locations so as not to arouse Lyft’s suspicions, suggests methods of recruiting, and outlines the process for signing up drivers on Uber’s platform.
And if the name Emil Michael -- the exec complaining to Bloomberg about Tencent playing dirty -- sounds familiar, perhaps that’s because late last year Michael made international headlines for his proposal to “go after” me and my family in order to silence our reporting on Uber. Comments the company itself later said “showed a lack of humanity.”
Others analysts are saying Uber can combat this, because it’s so tenacious and well-funded. Not compared to Didi.
Michael astoundingly told Bloomberg he believes Tencent will back down:
“I think as we continue to succeed, and it’s clear we’re in this for the long haul—we’ve got Chinese investors behind us; we’ve got partnerships with cities; we're spending money in the local economy; local investors have an interest in our success—then we’ll get into more of a détente mode.”
He can’t actually believe that. Even a man who thinks he can get away with threatening a journalist in a room full of journalists isn’t that delusional. It’s what you say when you are fundraising: And -- wouldn’t you know it?-- Michael is currently leading fundraising efforts for Uber China, which is a different entity than Uber itself. Unlike Uber, we’ve heard that Uber China has had significantly more trouble raising cash, because of its weak market position.
Blocking on WeChat is only act one of the hardball. If this doesn’t halt Uber’s growth in China, there are still other moves that will. Uber simply will not win in China. Even if the outrageous subsidies got it ahead of Didi and all its backers, the Chinese government itself will go on the attack.
This is not simply nationalism, although obviously there’s a lot of that too: Uber has deep ties with the US Department of Defense and also with the State Department. Late last year, Uber hired former CIA Director and Secretary of Defense Robert Gates to head its UberMILITARY arm. Also last year, it was reported that Emil Michael -- yep, that guy -- is working as an advisor to the Pentagon’s Defence Business Board, having previously worked as a special assistant to the Secretary of Defence. There is no way China will let any American company with ties to American intelligence and military run its urban transportation grid. Frankly, no country should.
And this isn’t just a China thing: America wouldn’t let a Chinese company with ties to its military and intelligence take over the cab infrastructure in major US cities. And you can imagine if the situation was reversed, Uber would be in Washington painting its own doomsday scenario and putting every lobbying dollar behind thwarting a foreign rival.
Uber has many smart people on its management team-- they knew this was coming. So why is Uber losing $1 billion in a market it can’t win? My guess is they needed to show mega growth in anticipation of its last funding round, with added pressure if “leaked” reports are true that the company plans to go public in the next 18 months. They’ve painted a global growth story to do it. And if you are pinning a $50 billion valuation to global growth, you simply can’t ignore China. You have to be in the market somehow and beg, borrow, and steal to show some kind of growth or momentum. To wit: Uber has plastered American media with reports of its surging Chinese market share, not once acknowledging the growth has only come because of wildly unsustainable subsidies.
And also-- as could be cross-stitched and hung somewhere in Uber’s war room-- Uber is doing this because Uber can. China will be the world’s largest ridesharing country. While capital is effectively free for Uber, it clearly feels it needs to go through the motions to own something in it. Why not? If it loses it’ll just cast itself in the “poor American company” role, which could win it some points with US lawmakers and riders. Uber as an underdog? The company hasn’t been able to sell that one since its earliest days going up against “big taxi.”
Uber’s advantages in the US were first-mover, an ability to control legislation via buying state legislatures or playing a smart grassroots lobbying game, and way more capital than anyone else could raise.
But in China, it’s Didi that has all of those advantages. If Uber has a shot, they are going to have to win another way. And the company has never proven it can.