When the news of Uber China’s merger with Didi broke, many Ola employees did not know how to react.
Some were initially happy that Uber had apparently been beaten (or even that it could be beaten), but as the implications became clearer, there was anger.
“Did they just give money to our competitor? Did they just hand a war chest to Uber to beat us in India?” wondered a senior executive. He was also apprehensive about the operational data Didi had on Ola thanks to their (now dead) anti-Uber alliance. Would Uber somehow get access to that?
Another executive was more circumspect. “The Didi-Uber deal does not look good in hindsight,” he rationalized. “We can’t go to any other country where the alliance exists and there is no market Ola sees in Europe. So, we are stuck here,” he said, before adding, “But one good market is still big enough.”
It would be hours before many would get over their emotions to only realize that their arch-nemesis was now also a shareholder.
Because as part of merger, Uber became one of Didi’s largest shareholders with a 17.7 percent stake (coincidentally, that number is fairly close to Uber’s approximate market share in China). And since Didi had invested $30 million in Ola just last September, indirectly Uber had become a shareholder in Ola.
The world had just shifted from under Ola.
China – The Long Con?
Did Uber lose in China? Let’s consider the facts.
Since quietly launching its China operations in Shanghai in August 2013, it is estimated to have spent around $2 billion to gain a market share of around 20 percent. After yesterday’s merger, Uber now controls 17.7 percent of Didi Chuxing at a valuation of $35 billion.
Which means Uber’s made over 3X of what it spent in just over two years. That too as stake in a company that is indisputably in control of the entire Chinese ride-hailing market and will easily continue to grow in size and valuation.
Many venture capitalists would *kill* for those kind of returns, especially at the scale.
But Uber wanted to conquer China, you say. A face-saving merger isn’t a victory by those standards.
Sure, if you think Uber’s founder and CEO Travis Kalanick was so enamoured with his ambition to conquer China that he never objectively considered the impossible odds he was facing.
In truth Uber never had a chance to become number one in China because it started too late and because the Chinese government never lets foreign companies win any market it considers vital to its economy.
Most reasonably smart people – analysts, opinion writers, experts – had long written off Uber’s chances of ever winning the Chinese market. So perhaps, just perhaps consider the fact that Kalanick was smart enough to realize this eventuality.
What then would his next best option for Uber in China be?
Something that would read pretty much like yesterday’s announcement.
This could mean either of two things: Uber CEO Travis Kalanick is gutsy and pugnacious enough to go fists swinging into a market he knows he cannot win, and still walk out stronger; or that Kalanick managed to pull a long con over some of the sharpest brains and elbows in the world and walk out stronger.
In either case, that makes Kalanick someone in whose sights you don’t want to be.
Unfortunately for Ola, they’re next.
Leapfrog Market
On the face of it, India doesn’t make sense for Uber to really spend too much time on. In August last year it was doing around 200,000 rides a day, and was expected to hit 1 million rides a day by May.
In comparison, Uber said it was doing 150 million trips a month in China (that’s 5 million a day) and over 2 billion trips across all its countries annually. Didi, its new partner, claims to do 11 million rides daily in China alone.
Why bother with India then?
Because, leapfrog.
In sector after sector, India has confounded many traditional market sizing experts who underestimated its large middle class’ propensity to “leapfrog” traditional product adoption curves.
That’s happened in Telecom. Internet. Smartphones. E-commerce.
Given affordable pricing and the network effects provided by connectivity, India has the propensity to become a game changer for many sectors.
Ride-sharing is a case in point. Car ownership in India is less than 20 for every thousand people, compared to 128 for China and nearly 800 for America.
There’s no reason Indians will first buy cars before realizing the convenience of using without owning – they will directly leapfrog to it.
Thus, any player that wins in the nascent Indian market of today gets to control a lucrative and massive market of tomorrow.
Float like a butterfly…
The number one ride-sharing provider in India is Ola. On that there is consensus.
But by how much does Ola lead? No one has a clue.
Both Ola and Uber India have perfected the game of feeding utterly made up statistics about their respective market leadership figures to the press, which now means no one really trusts either of them.
Sometimes Ola says it has an 85 percent market share, till Uber counters saying it has 50 percent.
Whatever the numbers, it is Ola that has more to lose.
Since starting operations in India from tech-driven Bangalore in September 2013, Uber always had a bias towards larger cities and richer, more tech-savvy customers. For over a year the only way to pay for Uber rides was by linking your credit card to your account, thus allowing Uber to direct its subsidies and marketing efforts towards a valuable sliver of Indians (just 21 million Indians own a credit card, in a country of over 1.3 billion people).
This paid them off well as there’s now a clear preference and loyalty for Uber among well-off customers in India’s biggest metro cities like Bangalore, Delhi and Mumbai.
With that as its core, Uber has gradually expanded to more cities (26 at last count) and payment options (pre-paid wallets in Dec 2014 and cash in July 2015).
In contrast, the main strategy behind Ola’s expansion has been an aggressive move into smaller cities, newer users and a broadening range of vehicle options.
Compared to Uber’s four ride segments UberPOOL for ride-sharing and UberGo, UberX and UberXL for private taxis, Ola has nine: Share (ride-sharing), Micro, Mini, Prime, Lux, Auto (three wheeler auto-rickshaws), Rentals, Outstation, and TaxiForSure (a brand it acquired).
Ola also claims to be present in over 100 cities compared to Uber’s 26.
Like a boxer constantly increasing the size of the ring so he can avoid having to face his stronger opponent at close range and for too long, it is hard to shake the feeling that Ola’s market share is to a large extent dependent upon newer markets and segments that Uber has not, *yet*, chosen to play in.
Or in strategy terms, no “defensible moats”.
This means Ola’s market leadership is not only ephemeral, but dependent on it constantly expanding into newer markets and categories. At some point either the options or the money will run out.
Ah yes, the money. Make no mistake. Ola’s survival rests on its ability to raise money – lots of money – going forward.
A knife to a gunfight
Ola’s last funding round was in September, when it raised $500 million at a valuation of $5 billion.
But that valuation is extremely fragile, dependent on it staying number one in terms of market share.
The moment investors sense that Uber has equaled Ola’s market share (or even reached striking distance), Ola’s asking valuation will fall. And with it, its ability to raise fresh funding of any significant amount to continue fighting Uber.
Didi merging with Uber also means the collapse of the other great hope – the global anti-Uber alliance comprising Didi, Ola, Grab and Lyft.
Within Ola, there’s a sense of betrayal at Didi for throwing in its lot with Uber.
And then there’s Ola’s exisiting investors.
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Softbank: 22.5%
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Tiger Global: 20.35%
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Matrix Partners: 11.45%
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DST Global: 8.4%
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Accel Partners: 2.81%
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Helion Venture Partners: 1.93%
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Others: 20.6%
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Founders: 11.95%
It’s important to note that the two biggest investors in Ola – Softbank and Tiger Global – are both currently going through a slower phase of investing in India and are unlikely to lead any fresh funding rounds.
Meanwhile with its exit from China and a cash pile that was over $11 billion in June, Uber can easily afford to increase its spending in India till as long as it wants to.
Replace China with India in this recent quote from Uber’s Kalanick below, and you get an idea of things.
This combination of cash-on-books, cash flow and single-minded focus to win at all costs is reminiscent of another US company currently giving sleepless nights to its local, market-leading competitor: Amazon (and Flipkart).
Perhaps the only card left for Ola now is the one that cost Uber, China – regulations and government.
Of course, there’s the Hail Mary
Yesterday when Kalanick wrote an internal blog post on Uber China merging with Didi, it promptly got leaked to WeChat, China’s most popular communications platform.
This was utterly ironic, because Uber China has had a tumultuous relationship with WeChat. Starting with March last year, when its official account was first blocked by WeChat, to December, when dozens of Uber accounts were summarily deleted by WeChat for “malicious marketing”,
Uber has been bravely fighting with both its hands tied in China.
And there, the ropes were provided by Chinese regulators and the government.
The Chinese government has made no secret of its preference for local players to dominate and control all key aspects of commerce, online and offline. Transportation is no different.
For years, taxi-hailing and ride-sharing apps have operated in the absence of clear laws, or even worse, against existing ones. And enforcement has been arbitrary, strict, or lax, depending on who you ask.
In May 2015 Uber China’s offices in Guangzhou and Chengdu were raided by regulators who accused the company of running illegal operations.
To be sure, Didi’s offices have been raided too. But the fervour was always lesser. One reason could be because the Chinese government was a Didi investor too.
Oh yeah. Did we forget to tell you that?
In August last year China Investment Corp. (CIC), the state-controlled sovereign wealth fund invested an unspecified amount in Didi. CIC’s other big tech investment is in the Alibaba Group (since this is China, Alibaba in turn is also an investor in Didi).
Then in May this year, Apple suddenly invested $1 billion in Didi in a move many analysts viewed as a way to curry favour with the Chinese government to safeguard its second-largest market globally.
Perhaps the final nail in Uber’s China coffin was the new rules for taxi ride-hailing that had been in “draft” stage for years. Released on July 28, they come into effect from 1st November. Broadly, they bring ride-hailing apps under the licensing authority of local regulators and impose certain conditions on the drivers and cars.
But they also reaffirm the primacy of local regulators who have the right to mandate a “government guidance price” whenever they feel necessary. Also, the rules prohibit players from “unfair or illegal pricing behaviour” that “disrupts market orders, damages state interests or other operator’s legal rights”.
As any reasonable person would surmise, those are wide enough for regulators to drive a truck through any time they choose.
The rules also forbid setting prices below cost to push competitors out or to dominate the market even though that was exactly what Uber China and Didi had been doing all this while.
Ola and Uber in India share many of the exact same regulatory conditions as in China.
From Delhi to Bangalore to Mumbai, Ola and Uber have been subjected to wave after wave of regulatory attacks that curb surge pricing; define price bands; mandate driver and vehicle conditions; and even the use of physical tripmeters, display boards and alarm buttons.
Unfortunately for Ola, creating a scalable and replicable playbook using regulations to thwart Uber will not be easy. That’s because unlike China’s one-party rule that extends across provinces and cities, India is a messy democracy with different parties in charge of the biggest markets. For instance, Bangalore is governed by the Congress, Delhi by the Aam Aadmi Party and Mumbai by the BJP.
As things stand today, Hail Mary can take Ola only so far.
Up till now, Ola has been a hard-charging, gritty competitor to Uber in India. Against all odds it has fought to maintain its leadership and refuse to be cowed down by Uber’s aggression, dirty tricks (the company is a past-master at those) and almost infinite funding.
But as things stand today, the future appears very bleak for Ola. There are no easy markets for it to expand into, whether domestic or foreign. No potential buyers, especially after a valuation round of $5 billion. No investors with the patience to wait for an exit, whenever it comes, or the stomach to fight a bruising battle with Uber.
Much as we hate to say it, it’s endgame Ola.
