The One Number That Matters for Uber China

There are a lot of numbers about Uber China right now.

• Uber China has raised $1.2B. Competitor Didi $3B.
• Uber is in +10 cities and going to 100(?). Didi is in 300, but mostly for taxi hailing.
• Uber China has 1M daily rides. Didi has 5M. Although these last two numbers are pretty questionable.

But the crucial number for Uber China is 4,000. That is Didi’s headcount today, which is way above Uber's reported 200 staff in China. And while the current fight is for drivers, rides and capital, this war will ultimately be won in quantity of brainpower.

Here’s my argument.

Chinese transportation apps began as a fight for taxi-hailing. That was the only big market in China at that time. And going for taxi-hailing avoided a confrontation with the State-owned taxi companies. Kuaidi and Didi won that round (and then merged). Uber sat it out. Although, I have argued Uber can still get into this market through partnerships with local governments.

The second round has been about getting a critical mass in private ride sharing (people using their own cars). Private rides are the truly massive opportunity in China but this is still in a grey area legally (lots of offices being raided and drivers being arrested). Private rides are disruptive to the State-owned taxi companies, so this is perilous. But both companies are now going after this regardless.

The key in Round 2 is to get to a critical mass in drivers and riders in each city. At a certain critical mass / volume, your costs and wait time per ride drop and it becomes difficult for new competitors to enter. The market consolidates and the leaders are protected by what economists call two-sided network economics (think credit cards and app stores).

Both Didi and Uber China are both now going for critical mass, mostly by raising capital and using it to subsidize rides. They are buying volume. Hence, their much discussed $1.2B and $3B capital raises and the large losses they have been taking. Uber is behind but they have the cash to get to critical mass in quite a few cities.

And this brings us to Round 3 and the fight for quantity of brainpower.

Round 3 (about to begin) will be an operational marathon between those with critical mass. Think Alibaba running Ebay into the ground. Or Google's fight with Baidu (Google was at approx. 30% marketshare and climbing when they decided to exit).

In this marathon, Didi and Uber will each begin offering more and more services. They will rapidly customize and re-customize their products for niche markets. They will do a flurry of partnerships and tie-ins with online and offline companies. And they will expand operationally across China, typically in sales, customer service and logistics.

It will become an operational marathon based on services, product development and depth of local operations. (Note: I am writing this in a Beijing Pizza Hut where the menu has 37 pages of products - including "bacon wrapped quail eggs with abalone mushroom". They also have an announcement for their 23 new products. Chinese restaurants are another operational marathon.)

That brings us back to the 4,000 number. Transportation app companies are basically engineering firms with a significant local operational component. It’s not just tech people sitting at the headquarters like Google. You have to build a nationwide operating platform. For example, Uber actually has the majority of their US employees located in cities around the country, not in San Francisco. These employees are either in driver operations (i.e., tech intensive logistics) or community relations (i.e., coordinating and marketing to local populations of riders). This local operational component is a particular problem in China given the vast geography.

So to win in China, you will need a nationwide operating platform and an aggressive product development capability. That will mean brainpower and lots and lots of bodies. Quantity of brainpower will be as important as quality. Didi today has 4,000 staff and very seasoned management on the ground in China. Uber reportedly has about 200 staff in China. And they have no full-time China head. That is a huge problem.

A side point.

Chinese technology companies now have something that most Western Internet companies do not – brainpower in huge quantities. For example, Huawei, the world’s leading telecommunications equipment company, has 170,000 employees. But over 70,000 of them are now in research and development. The ability to deploy increasingly educated scientists and engineers in great quantities is a new and devastating capability emerging in China.

Another aspect of Round 3 will be a capacity to suffer. Competition in China (online and offline) is often about who is willing to suffer the most. Everyone spends building factories and capacity. Everyone lowers prices. And everyone bleeds cash. The winner is the one who is able and willing to bleed the longest.

A good example of this was the decade-long fight between ctrip and eLong (owned by Expedia). While both got to scale early and had large marketshare, they had an ongoing war that caused ongoing losses. In early 2015, after losing about $100M in each of the two previous quarters, Expedia had had enough. After a decade of effort, they sold their stake in eLong and went home.

So as we head into Round 3, my questions for Uber would be:

• How are you going to get to 5,000-10,000 staff in China asap? How are you going to match the speed of product, service and operational improvements that are going to be coming out of Kuaidi?
• Are you willing to lose money in China for the next 5-10 years?What is your capacity to suffer? Everyone here knows if you bleed the foreign company long enough most will give up and go home.

Watch over the next months for press releases by Kuaidi. New partnerships. New products. New promotions. Etc. This operational marathon will play out in press releases over time.