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Uber’s Efforts to Build Chinese Business Ultimately Fail Against Homegrown Rival Didi

So far, no U.S. internet-based company has succeeded in conquering the Chinese market

By  EVA DOU and KATHY CHU

Updated Aug. 1, 2016 10:05 p.m. ET

BEIJING—Uber Technologies Co. entered China with billions of dollars to spend and ambitions to dominate the world’s biggest market for ride hailing. It wasn’t enough.

After almost three years, Uber  agreed to sell its China business  to rival Didi Chuxing Technology Co., the Chinese company announced Monday. Despite launching private ride-sharing services in China a full year before Didi, Uber has been outmaneuvered by the homegrown player, which added localized features, landed powerful investors and wooed Chinese regulators and press. Uber and outside investors in Uber China will get 20% in the merged company, which has a combined valuation of $36 billion.

U.S. internet companies have long struggled in vain  to capitalize on the allure of China’s enormous population and growing wealth. Some have been stymied by strict government licensing and censorship, which contributed to Google Inc.’s decision in 2010 to shutter its China-base search engine and has effectively barred access to Facebook  Inc. and  Twitter  Inc.

Others have been bested by deep-pocketed local rivals that adapt quickly to Chinese consumer preferences.  Amazon.com  Inc. and eBay  Inc. both faced off unsuccessfully against  Alibaba Group Holding  Ltd.

“So far we haven’t seen a foreign internet company that has made it big in China,” said Andrew Teoh, managing partner of Ameba Capital, an early investor in Didi.

Other companies in the technology industry and beyond have struggled with a range of hurdles in China, including government policies that favor domestic players. Apple  Inc. and  Microsoft Corp., for instance, have felt a sales chill in China amid Beijing’s growing focus on using “secure” domestic equipment.

“The environment has become more challenging,” said Jeremie Waterman, executive director for greater China at the U.S. Chamber of Commerce. “There’s no question that there are Chinese companies that are more competitive than they were five or 10 years ago, but there’s also no question that the government has and is increasingly putting its thumb on the scales to benefit Chinese companies.”

China is extremely important to many companies.  General Motors Co., which used decades-old alliances in the region to become one of the largest players in the world’s biggest light-vehicle market, counts on Chinese operations for about $2 billion in operating profit annually and has committed to spend 100 billion yuan ($15.1 billion) between now and 2020 on new car development. Although less profitable than U.S. operations, China accounts for about a third of vehicle sales and its position has grown in 2016 as the wider auto market shakes off volatility.

Still, a survey released in January by the American Chamber of Commerce in China found that only 64% of the U.S. companies surveyed were profitable in 2015—the lowest level in five years. Nearly a third weren’t planning to expand their investment in China, a higher percentage than during the global financial crisis of 2008-09.

Uber Chief Executive Travis Kalanick’s decision to capitulate in China came on the heels of  new ride-hailing regulations there, which were announced last week  but had been in the works for two years and were known to companies in the industry in advance.

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The guidelines officially legalized the industry, but gave an edge to the player with the largest user base. That was Didi, which is backed by Apple as well as Chinese internet giants Alibaba and Tencent Holdings Ltd.

The rules forbid companies to operate ride-hailing services below cost, putting an end to ruinous subsidy wars but making it difficult for Uber China, with its smaller scale, to match Didi on price.

The guidelines also require companies to implement stricter driver oversight and incur other overhead expenses, measures likely to be less costly per ride the larger the user base.

Didi and Uber disagree on their China market shares, but most third-party researchers put Didi significantly ahead. According to one research firm, Analysys International, Didi had 42.1 million active users in May while Uber China had 10.1 million.

Didi said it would maintain the Uber service and brand separately in China. A similar promise was made after the  merger of Didi Dache and Kuaidi Dache in 2015 to form Didi Chuxing , with the smaller Kuaidi product subsequently marginalized.

Mr. Kalanick, in a statement Monday, acknowledged the challenge Uber faced in entering China. “We were a young American business entering a country where most U.S. internet companies had failed to crack the code,” he said. Uber had worked hard to localize in China, setting up Uber China as a Chinese company and giving high autonomy to the local executives at its helm.

Didi began in 2012 as an app to help Chinese taxi drivers find passengers. Although the service didn’t make money for Didi, it helped the company amass loyal users. By the time Didi launched an Uber-like ride-sharing service in 2014, it had more than 100 million registered users.

In July 2014, Mr. Kalanick offered to acquire Didi,  saying that he would conquer China one way or the other , recalled Didi Chief Executive Cheng Wei in a 2015 interview. Mr. Cheng said he had refused, saying, “There will be a day when we will surpass you.”

An Uber spokeswoman confirmed the meeting at the time but said Uber executives remembered it differently.

Didi’s status as the local champion helped it best Uber both in relations with local governments and in the media.

Uber China found its accounts on China’s leading messaging app, WeChat, repeatedly shut down, hobbling its attempts to promote its services to regular consumers. WeChat is owned by Tencent, a Didi investor. Tencent has declined to comment.

Uber’s decision to effectively join a rival echoes similar moves by other big Western companies in China.

Wal-Mart Stores  Inc., which has struggled to expand in China as shopping rapidly shifts online there, switched gears in June. Rather than continuing to build its own online business in China, the world’s biggest retailer agreed to sell its Chinese website to  JD.com Inc., one of the country’s largest e-commerce players. In exchange, Wal-Mart took a 5% stake in JD.com.

—Juro Osawa, Drew FitzGerald and John D. Stoll contributed to this article.

Write to Eva Dou at  [email protected]  and Kathy Chu at [email protected]

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