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As the boasts continue, Uber’s stated expansion goals in China are starting to slip

As it quadruples cities served, will Uber also quadruple its $1 billion in annual Chinese subsidies?

By Sarah Lacy , written on January 20, 2016

From The Travis Shrugged Desk

How is it possible that Uber can claim 30%-35% of market share in China when it operates in one-tenth of the cities of its mega competitor? Answer: It isn’t. (And third party researchers have further said it isn’t the case.)

But that doesn’t stop Uber, which is in the middle of another big push to boast about how well things are going in China.

There was last week’s Information story which neglected to ask VP of Business Emil Michael about his current ties to the Department of Defense and whether that might be an issue for the Chinese government. Or, the fact that Uber has a history of using its app and drivers to organize political protests. I mean, it’s just China: A country so paranoid about the potential for political uprising that you can’t search online for Tiananmen Square or the phrase to describe a stock market crash.

It’s interesting that the surge in “leaked” news comes just after a few weeks of particularly critical reporting on how things are going for Uber in China, and Uber generally.

Yesterday’s “we’re crushing it!” story came from TechCrunch where the Uber China’s Head of Strategy Zhen Liu said that Uber would expand to 100 cities in China by the end of 2016. This is about four months longer to hit that milestone than the Verge reported back in September, when Travis Kalanick said they’d be in 100 cities within a year, at a creepy press conference where he recited typical communist talking points.

A quote from the Libertarian freedom fighter at that event:

"Progress is something we see the government be incredibly open to," Kalanick said, adding that such progress "always has to be in harmony with stability and that is one of the big things that we partnered with the government on." 

The first phase of this expansion is up from 22 cities to 37. Meanwhile Didi Kuaidi is in more than 360, with deeper pockets behind it and cozy ties to the government, WeChat, and AliPay-- all essentials to any player in this market.

But Uber is stuck: China is just so damn big, they can’t ignore it given their valuation and stated goals of global ride sharing domination. Uber has not been shy about the fact that China would be their largest market by the end of last year, and TechCrunch says Chengdu is their largest city worldwide now. And that’s with a minority market position.

Sure, spreading to 100 cities may be taking longer than Uber expected. But the bigger question-- and potentially the only one that should worry investors-- is what will it cost?

Uber has admitted to spending $1 billion annually in subsidies already and had to invest an additional $500 million of its own cash in Uber China, due to institutional investor apathy or as sources to Bloomberg phrased it at the time “as a show of confidence in the viability of the unit.”

Reminder, said apathy was even with deal sweeteners like putting at least 80% of the money into shares of Uber Global before its IPO, and this one:

“And if Uber China doesn’t list, investors would be able to sell their shares back for cash, plus compounded interest, or convert their holdings into stakes in Uber’s global company, according to the document.”

Even Chinese institutions who invested in Uber global, didn’t want part of the Uber China deal, investing in Didi instead. Baidu has been a noted exception, but bear in mind Alibaba and Tencent are in Didi. The “BATs” as the three mega Internet corps are called in China can’t all three back the same company, any more than Facebook, Google, Apple, Amazon and Netflix would all come together to back the same next generation startup here.

But apparently, last year’s Uber China playbook wasn’t aggressive enough. Zhen Liu told TechCrunch that “2015 was Uber China’s ‘Year of Localization’ and 2016 will be our ‘Year of Growth’.”

For that to happen, something is going to have to change. The cost of subsidies in China is in addition to losing money in the US, spending another $1 billion to grow in India, and countless other expenses in other markets that haven’t “leaked” yet. Uber itself is worried enough it’s been upping its own take from each ride, while driving down what drivers get in many markets, causing yet another nasty PR black eye in the US.

Uber is either going to need to raise a lot more capital in a contracting funding market or find a way to quadruple its footprint in China in one year without also quadrupling the huge cost of subsidies.

Given the market position of Didi and that it will still have more than triple the cities served even if Uber pulls this off, the former seems more likely than the latter. And with Uber Global insisting it doesn’t want to go public yet, and Chinese institutions mostly waving off the opportunity to invest in Uber China, Uber China may have to try its luck IPOing on an Asian exchange if it wants to keep this game up.  

And we all know that’s a safe bet right now.