Can a US consumer internet company ever make it big in China? That question, which has longdogged Silicon Valley, is starting to take on the urgency of a strategic imperative.
It isn’t just that China is a juicy target in its own right. There is a risk to ceding ground toemerging Chinese rivals in their booming home market at a time when those companies aretaking their first, tentative steps towards going global. US companies, themselvesaccustomed to using dominance of a massive domestic market as a launch pad to take onthe world, should understand what’s at stake.
Uber and Airbnb, the yin and yang of the sharing economy, are the latest to try their luck. Theride-hailing app that likes to batter down doors is in a pitched battle with a Chinese localcompetitor backed by two of those aspiring global players, Tencent and Alibaba. Airbnb, whichprefers a less confrontational approach, this week lined upsome influential allies as it seeksits own way in.
“Localisation” figures prominently in both companies’ game plans. Having the rightmanagement and local backers and supporters certainly helps. Knowing when to adapt asuccessful global formula will also be key. The failure in China of eBay, which was outflankedby Alibaba’s free listings for buyers and its introduction of a payment service to reduce fraudrisks, is still a case study in how an adaptable local rival can come out on top.
Uber and Airbnb at least have one advantage over companies like Google and Yahoo, whichfailed before them: they aren’t directly involved in the online media and communicationsbusinesses, making them less obviously targets of an authoritarian state.
But any successful internet business is to some extent a challenge to the status quo. China’slatest gesture towards online control — to station police officers physically inside internetcompanies — is an indication of the outsized influence that the successful internet companiescan have, whatever corner of the market they are in.
One reason is the amount and range of the data they hold. Amassing a giant database aboutthe movements of a nation’s citizens is a key asset. And that is likely to be only a startingpoint, as the winning platforms reach into more areas of online (and, increasingly, offline) life.
Holding the data locally might give authorities greater confidence that they can tap into it whenthey need: Uber has data centres for its operations inside China. But there is still a questionabout whether a foreign company could ever be trusted to be as compliant as a localcompetitor.
Another factor that weighs on foreign players is the way that competition tends to evolve ininternet markets. Many turn into winner-takes-all affairs, with the companies that come out ontop ending up as centres of power in their own right.
The immodest ambitions of a company like Uber highlight what is at stake. It aspires tobecome an essential part of the infrastructure of any big city, not only supplying personaltransport but also handling logistics. Local governments in China may resist foreign controlof something so essential, even if Uber promises to help solve some of the problems causedby swelling personal car ownership for China’s polluted and traffic-clogged cities.
A key question now will be how far the latest US aspirants are prepared to go to become truly“local” to overcome reservations like these. Uber’s funding arrangements for China are themost intriguing. It already has Chinese investors and is now trying to close a funding roundfor a separate Chinese unit, bringing outside investors directly into the business.
An Uber spokesperson says the company is also contemplating a local initial public offering,some time in the future, for its Chinese arm, though there are no plans for a one at themoment.
Given its huge need for capital and the particularly cut-throat nature of the Chinese taxi appwars, local investors will be useful. A structure like this would also give Uber more flexibility toadapt later — for instance by bringing in local partners or even, if forced, to reduce its stake inthe Chinese venture.
But for any US internet company, staying in the driving seat will be a priority. Yahoo’sdecision to fold its struggling Chinese business into Alibaba a decade ago turned into one ofthe most successful internet investments ever made. But now, as it gets ready to spin outwhat’s left of that minority stake, Yahoo’s diminished role is all too obvious. That is a fate itssuccessors will be working hard to avoid. (www.chinainout.com)
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