The Multibillion-dollar China Question: Should a mid-sized tech company tempt fate in China?

By boris, August 01, 2016

Didi Chuxing, the largest ride-hailing service is China, confirmed today that it will acquire Uber China. According to reports, the two companies will keep distinct brands, apps, and business operations, but the backends will be merged. The deal ends a long, costly battle between the two rivals: Uber had been spending $1B + a year to gain traction in China, while Didi Chuxing had been offering subsidies to its drivers and riders as well.

This news means that we can now add Uber to the long list of U.S. companies that couldn’t make it in China: eBay, Google, Facebook; the jury is still out on what Amazon’s eventual fate will be. Yes, Yahoo got a multibillion-dollar windfall from its investment in China (Alibaba), but it never built a successful standalone product/company there. It seems like hardware companies (Apple) are the only ones with a chance of making it in China.

There are many factors behind this string of failures. Companies operating in China face strict regulation/censorship (Facebook, Google, Twitter). There’s tough local competition (Uber and eBay). And there are cultural challenges that make it tough for a foreign company.

But, the China prize is so huge that every single large tech company will try to succeed despite the spotty history of its peers. China is a must-do for large public companies, but it’s a much more difficult question for mid-sized tech companies.

About 10 years ago, I traveled to China, South Korea and Japan for AbeBooks with my co-founder Hannes to understand our expansion options. We ultimately decided against going into China for three key reasons:

  1. Very different economics. The average selling price for a used book in China was $1, compared to about $24 on the AbeBooks platform. We’d need to sell many, many more books in China than the rest of the world to get the same revenues.
  2. Very different culture. We had already expanded into a number of European countries over the years, but China seemed much more challenging to conquer — from the way our potential sellers thought about doing business with us to the lack of employees with the right profile to head up the initiative.
  3. Risk relative to size. Ultimately, we were too small to take the risk. We would have to invest at least $8–10 million in this market which was simply too large of an investment relative to the size of our company (a very profitable $30–40m revenue business).

Does this mean that all mid-sized tech companies should stay out of China? Not necessarily. It’s an enormous opportunity and you can be successful if you have the following two things going for you.

  • You can find a trustworthy and powerful local partner
  • Your outsider status (e.g. your Western brand) is a competitive advantage, and local competitors would be at a disadvantage for being “local.”

In the end, every founder and CEO will look at the China question, see the track record of every company before him or her, and decide for themselves what’s best.


Originally published at versionone.vc on August 1, 2016.

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