Hey guys — big news: Today I’m launching
a brand new channel called “A Hill to Die On”. Stick around after this video to find out
how you can be the first to watch it right now thanks to today’s sponsor, CuriosityStream,
where you can watch thousands of great documentaries, and Nebula — together just $15 bucks a year. It’s happened countless times before: A
thriving American company enters China with 1.4 billion dollar signs in its eyes. It sees in the country almost the ideal market:
A middle class well over twice as large as its own and without the generational brand
loyalties of America. Because China was relatively late in its technological
development, it almost entirely skipped transitional, “in-between” inventions like desktop computers
and credit cards, making Chinese consumers generally less skeptical of new technologies
like smartphones. Best of all, all this is available through
one international expansion, one regulatory system, one language, and one culture. Or so, companies think. What they find is often very different. Relaxed regulation turns out to mean the law
is ambiguous and enforced selectively. Once a business model is proven, competition
may spring out of nowhere, sometimes with no regard for intellectual property. And what looks like a single, unified market
from the outside becomes thousands of unique ones up close. It’s happened, in one form or another, to
Amazon, Google, Mattel, eBay, Home Depot, Groupon, and many others. Uber, however, was sure it was different. It wasn’t ignorant of the titans that had
failed before it, but, in the mind of its outspoken founder, Travis Kalanick, Uber had
faced many “impossible challenges” from the very beginning — fighting hundreds of
angry cities as the company rapidly expanded across the U.S. Its very business model was at best legally
ambiguous, and yet, it succeeded anyway, giving Kalanick a certain unchecked confidence which
made China look like only another of its familiar hurdles. And to its credit, Uber did not make the classic
mistake: Directing the expansion from conference rooms in San Francisco. It tried very hard to build “Uber China”,
not merely Uber in China. After boldly declaring it the company’s
“number one priority”, Kalanick devoted himself to the expansion like nowhere else. He spent 70 days of 2015 in the country — nearly
1/5th of the entire year. He even joked that he should apply for Chinese
citizenship. Uber created a separate, Chinese company,
partnered with local investors like the Chinese tech giant Baidu, and launched in 2013 in
the country’s largest city, Shanghai. At first, things were rocky. For example, it launched with only US credit
card support, making sure the vast majority of locals, who use WeChat and AliPay, were
unable to book rides. Just as embarrassing, the app used Google
Maps, which is notoriously bad in China. By far Uber’s biggest problem, however,
was, well, its entire business model. The company doesn’t own its cars or hire
its employees, meaning its only value is connecting people who want to drive to nearby people
to want to ride. But because drivers and riders are regional,
entering a new city is like starting from scratch. Uber may have a monopoly in LA, but that won’t
mean anything when it expands to Seattle. The good thing is that once it has the critical
number of both drivers and riders in a particular city, they’re very likely to stick with
Uber. It only takes 2.7 rides, according to the
company, before someone becomes a permanent customer. Uber’s strategy, therefore, was to grow
with lightning speed. Every major city had its own general manager,
who would tempt new drivers with bonuses and new customers with free rides. Becoming a driver was easy, no long background
checks or complicated forms required. This worked pretty well. When it was first. The problem was that, in China, it wasn’t. It’s Chinese competitor — Didi — was
founded in 2012 and had everything Uber needed: immense scale, a China-first design, and the
support of government. While Uber operated by disrupting the taxi
monopoly in each new city it entered, Didi was much more old fashioned — it merely
connected riders to existing licensed taxi drivers. So instead of inciting chaos and even violence
like Uber, Didi was on the good side of authorities — even helping manage over 1,300 traffic
lights in partnership with city governments. In 2015, Didi merged with its closest competitor,
giving it near-monopoly control of the market. It became the only company in the world backed
by all three of China’s tech giants: Baidu, Alibaba, and Tencent. Apple and China’s sovereign wealth fund
also invested around that time. Uber was behind from day 1. If a Chinese user already had Didi, the only
reason they’d switch is if it was that much cheaper. To catch up, Uber had to dump insane amounts
of money. And, that’s exactly what it did. Uber spent a jaw-dropping $40-50 million US
dollars per week on free rides and bonuses in China. It lost, in total, $1 billion every year. With Didi, it played a massive game of chicken
— spending this much money was unsustainable, but who would give up first? This metaphorical arms race also created a
kind-of cold war dynamic. Didi allegedly sent undercover engineers to
be hired by Uber, where they would collect trade secrets and even conduct sabotage. On occasion, Uber would be blocked from WeChat. In China, this was the equivalent of Google
hiding a competitor from its search results — making it effectively invisible to the
vast majority of the country. And besides burning through cash like it was
fuel, this subsidy-war also led to an unintended side-effect: fraud. In one Chinese city, Uber reported having
as many drivers as London, Paris, and San Francisco combined. But how many of them were real? When a “new” user was offered a free promotional
Uber ride, the company still paid the driver as normal. This created a loophole. Two users, one acting as the “driver”,
and the other as the “rider” could collude, taking a fake ride, and splitting the profit. Soon, scammers created entire circuit boards
with rows of SIM card slots, each simulating a fake phone. They would take a fake ride, swap out SIM
cards, and repeat. In one Chinese city, fraud accounted for an
estimated half of all rides. Over 30,000 fake rides were taken every day
in the summer of 2015, just in China. Uber fought back by creating a database of
IMEI numbers, which are unique to a given phone and thus allowed the company to identify
a scammer even after they had reset their phone. However, Apple hid this number from developers
starting in 2012 for its users’ privacy, preventing Uber from detecting fraud. Uber was undeterred and hired a 3rd party
hacking company to bypass iOS’ security rules, which, Apple discovered, warning them
to stop. In its typical fashion, Uber continued anyway,
adding a line of code to check if the app was running in Cupertino, California, where
Apple is headquartered, and if so, not break its rules. Apple still found out, and called a very angry
meeting. Things were not going well for Uber. It faced massive fraud, trouble with Apple,
and over $1 billion a year in losses. Then came the final nail in the coffin. For its first few years in China, Uber operated
in a legal grey area. Like in the U.S., this subjected it to varying
levels of retribution based on the mood of each municipal government. In the Southern city of Guangzhou, police
raided the Uber office at midnight, accusing it of running an illegal business. In Hangzhou, another police raid was followed
by a violent confrontation between Uber and taxi drivers. All this changed in July 2016, after a series
of high-profile crimes committed by Didi drivers. China legalized the industry, which came with
strict new regulation, like there could be no subsidies and drivers required 3-years
of experience. From now on, Uber would need to request formal
approval from the local and national government before expanding to each new city. At the beginning of that year, Uber operated
in 37 Chinese cities to Didi’s 400, and had 229 million daily active users compared
with 908. Just a few short years after it had sprinted
into the country with supreme confidence, it had all finally become too much. Just days after the new regulations were passed,
Uber China was sold to Didi. Uber took a 19% stake in Didi, and the leaders
of both received positions on each other’s board of directors. Whether this was an embarrassing failure or
a diligent strategic decision is still open for debate. On one hand, Uber unequivocally did not achieve
its original goals of conquering the Chinese market. It left with only a minuscule market share
and incredible losses. It did not succeed where others had failed
in China, and even though government protectionism may be somewhat to blame, Uber certainly made
many unforced errors along the way. On the other hand, Uber spent $2 billion on
China and left with assets valued at seven billion dollars. Viewed purely from the balance sheet, China
was, unlike most of the company’s markets, a source of pure profit. It could now invest that money in other, more
win-able markets in Southeast Asia and elsewhere. So, a failure, yes. But, also, a profitable one. It’s too late to get in on the ground floor
of Uber, but you can be one of the very first subscribers to my new channel, A Hill to Die
On. Go subscribe now to watch the first two videos
as soon as they’re released on October 27th at 11 am Eastern. But, you can also watch them right this second
on Nebula. Nebula is the streaming site I built along
with my fellow creators to give you the very best viewing experience. Think of it as the “expansion pack” for
YouTube: you get videos ad-free, early, with bonus content, and entirely exclusive Originals,
like the game show “Money” hosted by Tom Scott. And because we’ve partnered with CuriosityStream,
you can also watch thousands of great documentaries on science, history, and nature for just $15
bucks a month. Use the link in the description to get both
CuriosityStream and Nebula, watch my new channel today, and help support creators like myself
do new and exciting things, like launching this new channel, for one incredibly low annual
price. Thanks to CuriosityStream and Nebula for sponsoring
this video, and I’ll see you over on the new channel!
Great video
I lol'd at "Uber spent 2 billion on China and left with 7 billion in assets"
Failing upwards!