If Uber couldn’t make it in China after doing almost everything right—hiring local, cozing up to governments, earmarking billions for the fight—can any U.S. technology company?
Not with the dominance Uber envisioned. That’s not how China is designed.
Even before China president Xi Jinping’s latest strongman campaign to wean China off foreign technology under the guise of national security, the government has insisted on information control befitting a one-party state. That led to the blocking of Google (GOOGL), Facebook (FB), and Twitter (TWTR), and the rise of Chinese alternatives that would abide by censorship demands. After the U.S. tech firms were expunged around 2009, this new Chinese tech order took shape.
Baidu and Tencent were the biggest beneficiaries. Baidu’s censored search now controls 80% of the Chinese market, while Tencent’s WeChat social network and QQ messenger—also censored, sometimes heavily—enjoy dominant market shares.
China’s tech market is shaped and controlled by four big players: Baidu, Alibaba, Tencent, and the government. The big three tech companies have spent billions expanding into every conceivable new tech vertical in the country: payments, autonomous cars, health care, insurance, and of course ridesharing. The government, meanwhile, sets the rules and has amassed its own $340 billion venture capital fund.
So when Uber came to China in 2014, it was not only going up against local ridesharing competitors, but also this government-supported group of tech giants. Tencent was an early backer of Didi, and Alibaba (BABA) had become one after betting on a competitor that merged with Didi last year.
Uber knew what it was up against. Founder Travis Kalanick tried to allay government concerns with repeated country visits and promises of employment and efficiency improvements in cities. He even got Uber backing from Baidu (BIDU), the one company of the big three tech giants that wasn’t already betting on a ridesharing winner.
But even if foreign tech companies don’t experience overt government discrimination—as Uber did not—they are faced with a government-aligned group with deep pockets to support homegrown startups. Tencent (TCEHY) invested $15 million into Didi back in 2013 and has been funneling hundreds of millions into it since.
Tencent especially wasn’t shy about pushing its agenda supporting Didi. On WeChat, Uber’s public accounts for hiring and services were shut down three separate times last year, starting in the spring. By August, Uber was gone from WeChat. Tencent might be able to pass it off as a glitch, however improbable, except something similar happened two weeks ago when another Baidu-backed ridesharing startup called Yidao unveiled a price comparison tool aimed at undercutting Didi. WeChat immediately blocked its website. Tencent later said the company broke WeChat’s rules, prompting Yidao founder Zhou Hang to conclude, “Only Didi is an exception [to the rule].”
China’s tech giants joining proxy wars makes the Chinese market tough to win for outsiders. This, combined with the difficulty of beating Chinese competitors who understand their home market better—Didi never lost its market share lead to Uber thanks in part to local executives who understood there was a big market for ridesharing on buses, for instance—makes outsiders’ chances at success today near impossible.
Almost any foreign tech company trying to expand to China faces this dynamic. Deep-pocketed Chinese tech companies like Tencent can play the long game. After all, it was Uber’s local investors who were clamoring to get out of China—out from under the $1-billion a year Uber was losing in its fight against Didi.
That’s how China is now stacked up.