Uber and Under: China’s Hometown Advantage Claims Another Victim
Attention Trump! Here’s a case where a country actually has built a (virtual) wall to impede American success in its market
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The headlines early this week were shared by the Republican candidate for president of the United States and one of Silicon Valley’s most ambitious startups. The latter story was that the ride-sharing company Uber, after a massive investment in capital and energy in winning the Chinese market, had capitulated, selling its operations to local competitor Didi Chuxing. The other object of the headlines had yet to comment on this. So let me channel Donald Trump for a minute.
China…they’re laughing at us. We buy all their products — huge trade deficits, yyyyyyyyuge! — and when our companies come there to compete, they find all sorts of barriers that Chinese companies don’t have. We need a better deal!
China is the world’s biggest internet market, and it’s destined to become the leading economy of this century. American technology companies are desperate to compete there, with dreams of reaching the same dominant market share in China that they have elsewhere in the world. But instead of commercial triumph, there has been a series of ignominious retreats, even for some of the most glorious pillars of American tech: Amazon, eBay, Google, and so on. Meanwhile, Facebook hasn’t even gotten far enough in the market to make a retreat. It keeps edging closer, even to the point where its CEO has learned to speak Mandarin — but can’t figure out how to enter the country while still following China’s strict rules of censorship and control of data.
Uber was the latest gladiator, and seemingly one that had a chance at victory. It was going head to head with its Chinese rival Didi with a war chest full of cash and a world domination mentality. As late as this past June, Uber was predicting it would pass its rival within a year. Now Uber is simply the most recent American internet giant who decided China was not worth the fight. And it probably won’t be the last.
China is hard. The reasons differ according to the sector and the company, but the combination of culture, nationalism, and especially a government that likes to tilt the playing field has prevented American giants who excel overseas from dominating in China. This is not to say that Chinese government regulation drove Uber’s deal with Didi, which was clobbering Uber in the ride-sharing market; in fact, Uber felt it was treated fairly by a government interested in transportation innovation. According to reports on the ground, Didi used its local knowledge to act more nimbly in satisfying Chinese customers. But my guess is that if the American ride-sharing company had been more successful, China would have put a Mao-sized thumb on the scales.
I got a close look at those challenges when writing my book about Google, which included a 47-page chapter on the company’s fiasco in China. Though the business of a search engine has special challenges, Google’s experience is still instructive, not only to the compromises American companies must make to enter China, but the hurdles they face even when they make those disturbing compromises. In fact, any company entering the Chinese market ignores the Google story at its peril.
Google’s first challenge was to reconcile its ideals with the fact that China would not allow it to operate a search engine without political censorship. Not everyone at Google was happy with the decision to do so. Civil liberties activists and legislators ripped into the company. But the ruling troika in Mountain View — Eric Schmidt, Larry Page, and a more reluctant Sergey Brin — went against principle to get Google search into China, rationalizing the decision by viewing it as part of a larger tradeoff. The Chinese people, they figured, would benefit from Google’s presence because they would have access to so much information that wasn’t censored.
But Google found that even after a company agrees to go along with China’s censorship and data demands, regulation doesn’t stop. Put simply, China likes locals to succeed over foreign companies, and will act accordingly. Google was in direct competition with a local company, Baidu, which seemed to copy Google’s business plan and even its interface. China had an interest in seeing its hometown search engine win, and turned out to be less than scrupulous in playing the role as a neutral arbiter.
Yes, Google made its own mistakes, including some cultural miscues. But the actions of the Chinese government against Google seemed less to do with regulations and more like harassment. The sanctions appeared directly tied to how well Google was doing in the marketplace. Google executives believed that Chinese officials had drawn a line in the sand — that when Google market share approached thirty percent, suddenly bad things would happen. In China, companies need a license to run a website, and it took Google massive effort to secure one. But at one point the government suddenly decided that Google’s license had to be reconsidered. Google got past that, but it took a lot of energy. And Google’s executives in China realized they were always one step away from another sanction.
The hurdles could be unpredictable, with an element of deniability. Sometimes Google found itself at the mercy of China’s ability to manipulate the digital infrastructure. The site would work slowly, or there would be outages. In one instance, Google found not only that users were blocked from its site, but also that when they typed in the address, they would be redirected to it competitor Baidu. This played into the narrative spun by Baidu that Google was overmatched in serving China, and that the local option was more reliable.
Sometimes, Chinese officials would complain about some previously-uncommented-on aspect of Google’s search engine. In 2009, Google rolled out a feature called “suggest” that quickly responded with a choice of destinations when a user typed a search query. Some of Google’s foes — it wasn’t clear whether the government or competitors were at work — had undertaken a massive keyboard spam campaign to link innocuous terms to sex sites. OMG, you can find porn on Google! The Chinese used this as an occasion to “spank” the company by loading more restrictions to its business. But as a special flourish, they summoned Google’s leader in China, Kai-Fu Lee, to a hotel conference room, where he was forced to watch the actual porn sites that were suggested by Google queries.
The worst came when Chinese hackers penetrated Google’s systems, stole some of its intellectual property and, worst of all, discovered the identities of dissidents who used Gmail under pseudonyms. In postmortems with Google executives, the executives often referred to this incident as “the last straw.”
It was the combination of the hack, the constant harassment, and a growing remorse about the moral capitulation to government censorship that led to Google’s decision to remove censorship from its Chinese website, the equivalent of leaving the Chinese search market. Google didn’t withdraw its business entirely. It still has a presence through Android, the leading operating system there. But the company gets less value from Android because Google search features can’t live on the phones in China.
Google’s retreat came in 2010, so it’s fair to ask whether those regulatory issues still exist. One experience to look at would be Apple’s. Though Apple is arguably one of the most successful US companies in China — it did almost $9 billion in revenue there in its most recent quarter, though that represents a decline from its high of $13.2 billion — the company has experienced its own share of hurdles. It took many years for Apple to get licenses to do business in China and to reach deals with the Chinese carriers, during which time competitors were able to build smartphone businesses. More recently China shut down Apple’s iTunes movie store, as well as iBooks. Most alarming of all, the Chinese court system seems to be working against Apple. This year a Beijing court ruled Apple’s iPhone infringed the patent of a tiny company you’ve probably never heard of. Observers did not see this as a victory for jurisprudence, but rather a sign that China was spreading nails on the road as Apple prepared to roll out its new iPhones later this year.
To be fair, the American marketplace has not exactly been a fertile ground for Chinese internet companies hoping to break in. Though many of the really big players — Baidu, Alibaba, TenCent, WeChat — have moved on from clone-ish beginnings and actually come up with important innovations, none have made an impact here. But that’s due more to a lack of resolve than any regulatory barriers. Those companies have yet to make anything like the multi-billion dollar investments that American companies have expended in China. If they did, I’d bet that instead of regulatory hurdles, state and county politicians would give them tax breaks to site their headquarters locally.
Perhaps because its market share never rose high enough, Uber did not experience the brunt of China’s regulation. Still, who’s to say what would have happened if Uber had managed to outperform Didi? If Uber’s market share topped fifty percent, would the government have sat by as a neutral observer? Would the Uber app start experiencing slowdowns? Would its drivers be stopped? Would airports welcome Didi cars and not Uber? My bet is that, mixed with disappointment at not winning the country, Uber executives might be feeling a bit relieved that such worries are now off the table. As it is, Uber has become one more casualty in China’s other wall, a towering fortress of restrictions, regulations and unfair play that keeps down American internet companies.
I’ll give the last word to my channeled version of The Donald. After all, he knows his walls.
Starting on my first day in the White House, all people in China will use Google as a search engine, join Facebook, buy movies from Apple, and instead of making smart phones, Chinese workers will take Ubers to Tiananmen Square. At surge prices!
If it were only that easy….
