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39427The world’s most-highly-capitalized startup was now pitted against a powerful Beijing firm backed by China’s largest Internet giants, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. Uber and Didi Kuaidi are fighting to raise funds for expansion while they compete to woo drivers to their private-car-hailing services and navigate China’s tough regulatory environment. Uber is raising a billion-dollar funding round for UberChina and secured prominent Beijing-based fund manager Hillhouse Capital Group as an investor in a convertible bond for Uber’s global parent company, say people familiar with the deals.
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As Uber Technologies Inc. chief Travis Kalanick was preparing for an all-out push into China, he visited the country’s dominant ride-hailing company in July 2014. Mr. Kalanick suggested Uber invest in the company, the Beijing startup’s chief executive says.
“His message was they had conquered the whole world and would also conquer China,” says the CEO, Cheng Wei, who headed a company named Didi Dache.
Mr. Cheng says he rejected Mr. Kalanick’s overture after hours of discussion. “You are earlier than us” globally, he says he told the Uber CEO, “but there will be a day when we will surpass you.”
An Uber spokeswoman says the San Francisco company recalls the meeting differently, declining to say how. “It was super friendly,” she says. “Cheng Wei greeted Travis with the words ‘you are my inspiration.’ ”
Any friendliness has worn thin, as a rivalry between Mr. Kalanick and Mr. Cheng over China’s multibillion-dollar ride-hailing market erupts into an all-out brawl.
Mr. Cheng in February merged Didi with his domestic rival, Kuaidi Dache, forming Didi Kuaidi Joint Co. and becoming its CEO. The world’s most-highly-capitalized startup was now pitted against a powerful Beijing firm backed by China’s largest Internet giants, Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
Uber and Didi Kuaidi are fighting to raise funds for expansion while they compete to woo drivers to their private-car-hailing services and navigate China’s tough regulatory environment.
At stake is the world’s largest market of urban commuters. At 750 million people by some estimates, the market is more than twice the total U.S. population and includes 25 cities more populous than Los Angeles. With hundreds of millions expected to join the middle class over the next decade in China, the potential growth in ride-hailing is huge.
“You’re not going to find a country with 80-plus cities over five million people anywhere else,” Mr. Kalanick says. “The vastness of the opportunities really isn’t matched in any other market.”
As Mr. Kalanick works to justify Uber’s $51 billion valuation, he is investing $1 billion this year in China, its most important overseas market. Five of Uber’s top 10 cities by ride count are now in China. Its Chinese entity, UberChina, has secured a strategic partner in search-and-mapping leader Baidu Inc. Mr. Kalanick told investors in June he is overseeing day-to-day operations of the China business.
Didi Kuaidi, which means “Beep Beep Fast Cab,” was a $6 billion merger of China’s two main apps for booking traditional taxis. It soon expanded into also offering Uber-style ride-hailing.
With a $15 billion valuation, Didi Kuaidi is China’s second-most-valuable startup after smartphone seller Xiaomi Corp. It touts itself as a friendlier competitor than Uber because it cooperates with the taxi sector.
Didi Kuaidi outguns Uber in China. It employs about 4,000, versus Uber’s 200 in China. It has a near monopoly on hailing traditional taxis via smartphone and more than 80% of China’s private-car-hailing market in June, according to investment advisory firm RedTech Advisors.
Didi Kuaidi says it has private cars in more than 80 Chinese cities, including all of Uber’s 16 cities. Uber says it plans to launch in 45 more over the next year. Didi Kuaidi says it has around a million private-car drivers. Uber declines to say how many drivers it has in China, but Mr. Kalanick said in a June letter to investors Uber was creating over 100,000 full-time-equivalent jobs a month in the country.
Uber has a technological edge, some drivers say, including more accurate maps due to its Baidu partnership. A Didi Kuaidi spokeswoman says the company’s maps, provided by Alibaba and Tencent, cover roughly the same geography as Baidu’s.
Beijing resident Rachel Zhang, 30, says she rides with both. “For a while, Uber was more convenient because their high subsidies for drivers meant you could get a ride fast,” she says. “Recently, I’m using Didi more, because they have more types of ride services, and Uber’s fares have gone up.”
To fuel their China expansion, the rivals are building war chests. Uber is raising a billion-dollar funding round for UberChina and secured prominent Beijing-based fund manager Hillhouse Capital Group as an investor in a convertible bond for Uber’s global parent company, say people familiar with the deals. Hillhouse is also an investor in Didi Kuaidi.
Didi Kuaidi raised $2 billion in July — more than it immediately needed, say people familiar with the funding. Both companies canvassed investors in June for their latest rounds, with Didi Kuaidi finishing its first closing, landing prominent investors such as New York hedge fund Coatue Management LLC.
China’s sovereign-wealth fund is part of a second closing that could raise up to $1 billion more, say people familiar with the round.
They need the cash as they spend heavily to build out their operations. Didi Kuaidi has recorded hundreds of millions of dollars in operating losses this year, say people familiar with its finances. Analysts say Uber is also seeing big operating losses in China. Uber declines to comment on its China financials.
Heightening the rivalry, Didi Kuaidi and Uber have each hired cousins from the same prominent Chinese family. In February, Didi Kuaidi named as president 37-year-old Jean Liu, a former Goldman Sachs banker and the daughter of Lenovo Group Ltd. founder Liu Chuanzhi. Uber brought on her cousin, Liu Zhen, a lawyer and niece of Lenovo’s founder, as its China strategy chief.
China may be Uber’s toughest fight yet: Gloves-off tactics aren’t only common, but expected in the country. Competing in China, Mr. Kalanick said in the investor letter, “is not for the faint of heart.”
Mr. Kalanick said in the letter that Uber drivers had received text messages incorrectly saying UberChina was shutting down. Uber has accused Didi Kuaidi investor Tencent of deleting Uber’s accounts in China’s ubiquitous mobile chat app WeChat, cutting off the most effective way to communicate with users and drivers. Didi Kuaidi offers coupons in WeChat. Tencent declined to comment.
Few U.S. Internet companies have succeeded in China, partly due to Beijing’s preference for local players it can better control. To help avoid getting shut out, Uber has been aggressively localizing its China operations since entering the market in 2014. “We’re making sure that UberChina is a separate entity,” says Mr. Kalanick, “and one that sort of controls its own destiny.”
Private ride-hailing is technically illegal in most Chinese cities, although Didi Kuaidi says it is working with Shanghai and Zhuhai to create regulatory frameworks that would provide a path for legalization. Beijing city authorities blamed Didi Kuaidi and Uber in July for increasing traffic congestion and said the companies were suspected of running illegal taxi services and evading taxes, according to China’s official Xinhua agency.
More than 1,200 private drivers from Didi Kuaidi and 170 from Uber were caught by Beijing authorities this year and punished, according to Xinhua. The companies say they pay fines for drivers who are caught and are cooperating with the government. Beijing and Shanghai transportation regulators didn’t respond to inquiries.
“Public transportation should be prioritized,” the Beijing Municipal Commission of Transport said, according to Xinhua. Officials have raided Uber’s offices in some other major cities. Both companies say they can decrease traffic congestion through carpools and other services.
While both companies cooperate with some car-rental firms for better legal cover, Beijing drivers are wary of places like the airport where crackdowns occur. Drivers swap rumors of police sweeps through WeChat’s walkie-talkie feature as they drive.
“We’ve managed to survive in the country’s most brutal market,” Mr. Cheng said at a recent launch event, noting the continual regulatory controversies.
And there is unrest among taxi drivers, who have seen earnings drop and have organized strikes across China. One Beijing taxi driver says he once made around 8,000 yuan ($1,250) a month but now makes only around half that. “Some taxi drivers I know have switched over to driving private cars,” he says. “I’m considering it too.”
Didi Kuaidi says it is eager to work with taxi companies. “Our philosophy is we don’t really believe in disruptive termination,” Ms. Liu says, referring to Uber’s disruption of the taxi business.
Didi Kuaidi is also trying to stay ahead by launching broader options, including buses and chauffeur services this summer and a service this fall to help potential car buyers book test-drive vehicles, people familiar with the matter say.
Although analysts say Didi Kuaidi has a leg up on government relations as the local player, Mr. Kalanick has crisscrossed China hobnobbing with government officials and businesses. He says Uber is basing its data centers for its China business in the country.
The move puts its data under Beijing’s control but could help it avoid getting shut out of the market. Uber has also hired previous government employees to key posts, including its China Communications Lead Huang Xue, who used to work for China’s State Administration of Radio, Film and Television.
The companies compete for drivers, as retaining them is crucial to keeping rider wait times low. “How to keep the drivers, how to grow the drivers,” Didi Kuaidi’s Ms. Liu says, is “a major challenge for anyone who wants to build something big in China’s mobile transportation sector.”
Both companies have sought to woo drivers with bonuses to those who rack up rides. Uber has offered larger bonuses in an effort to catch up in scale, earlier this year giving as much as 7,000 yuan weekly to Beijing drivers who completed a high number of rides — quadruple a traditional taxi driver’s wages, according to drivers. Both companies have bonuses for individual rides during peak times and smaller bonuses for individual achievements, such as referring friends or getting high ratings.
Now the challenge for both is keeping drivers and riders while weaning them off bonuses and coupons.
Yang Yang, a 33-year-old Uber driver in Beijing, says bonuses are increasingly difficult to get. He stays on the road 12 to 14 hours a day to qualify for the weekly bonus, using minty salves to stay awake.
The lure of bonuses has led drivers to game the system. Uber and Didi Kuaidi battle drivers who book fake rides — known as “brushing” in China. In brushing, the scammer will typically pose as both driver and rider, essentially paying himself multiple times to build up enough fake business to win a bonus.
Rings of scammers use specialized software bought online to rack up fake rides while they sit at home, drivers interviewed say. They say they get calls and texts from people offering to help them scam Uber for a fee. Didi Kuaidi is suffering less from the problem, according to drivers, as its lower driver bonuses are less of a draw.
An Uber driver in Beijing says brushing hurts honest drivers like him. His driver log shows 10 of his 18 ride requests from the previous day canceled by the customer. “That’s all scammers,” he says. “It’s so difficult to be an honest driver now.”
Uber says its bonuses were higher early this year but are quite low now, and that the rate of fake rides in China is falling — only at 3%, in line with its global averages. Didi Kuaidi’s Ms. Liu says her company has low fraud rates and tight policies to check driver identities.
Uber says it freezes brushers’ accounts. Didi Kuaidi says it fines them thrice their fares, sometimes resulting in drivers owing the company.
At Didi Kuaidi’s old headquarters this summer, dozens of drivers angrily waved smartphones showing negative account balances. “Give us back our money!” they yelled. Didi Kuaidi “virtually does not have fake orders,” a spokeswoman says, “because we have established a strong antifraud team.”
At Uber’s Beijing driver help center, whose address is unlisted and which has a different company’s name in the lobby, similar groups of angry drivers whose accounts were frozen for alleged fraud come to complain after finding the office through word-of-mouth. “We absolutely shut down rider and driver accounts when we see fraud,” an Uber spokeswoman says.
Amid controversy, competition and regulation, Uber’s Mr. Kalanick says, “the primary question is, will Uber be allowed to stay successful in China?”
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