Uber China to Surpass U.S. Market

Uber has truly arrived in China.

Technically, it got there in early 2014. But until this year, the 6-year-old, $51 billion ride-sharing “startup” had been experiencing difficulties with various government entities.

The transportation mogul regrouped, got some influential Chinese investors on board, hired nearly 100% local, and is now taking off like a rocket.

You could say I underestimated its chances back in May when I wrote, “Uber faces a long road ahead if it hopes to take over China. But I suspect it’ll get there eventually.”

Well, it’s not No. 1 yet. But it’s close and accelerating.

Uber China already makes up 30% of the company’s worldwide revenue.

Bloomberg reports China will surpass the entire U.S. by the end of this year. In a short time, it’s grabbed a big slice of the total market, estimated to be around 30% to 35%.

Amazingly, there are already three cities in China doing more rides per day than New York.

This should give you an idea of how massive China’s market has become. Especially once you realize Uber is only the second-largest ride-sharing app in China.

It faces stiff competition from local powerhouse Didi Kuaidi, recently valued at $16 billion.

Big Didi

According to the South China Morning Post, Didi Kuaidi is doing 7 million rides a day in China. Traditional taxis make up about 2 million of those, with various private car and ride-sharing services making up the rest.

Didi is massive, fast-growing and working hard to innovate and stay on top of the competition. It recently started a bus app for longer-distance trips. And its new “Hitch” offering, advertised as a professional networking tool, seems interesting.

With Hitch, users enter their destination into the app on the way to work, and Didi finds someone to pick up on the way. The company says it plans to match riders based on shared interests in the future.

There’s no “fare,” per se, the rider simply pitches in a small amount. Naturally, Didi takes a cut of the transaction.

The question is: Will it be able to stay on top with the global juggernaut in town?

Who Wins?

I suspect Uber will win the majority in China, eventually. But there’s no reason Didi couldn’t occupy second place. Think FedEx vs. UPS. Healthy competition.

Of course, the government is somewhat of a wildcard in the situation. It could get involved in favor of the local boys and chase Uber out of town. With major local backers now, though, Uber is in a more secure spot.

And there’s no doubt CEO Travis Kalanick has talent and ambition to spare. He’s the driving force behind the company’s meteoric rise.

But if I had to invest in one of the two at current prices, I’d probably choose Didi.

You may be thinking: How could anyone pass up Uber? A company that will almost certainly own the first fleet of self-driving taxis? How could you not invest in that?

For starters, Didi Kuaidi’s current valuation of $16 billion leaves more room for growth vs. Uber’s $51 billion. Didi is growing faster, on pace for 15 times growth year over year.

Yes, 15 times growth. In 2014, the startup did $30 million net revenue, and this year it’s on pace for $450 million, according to the Financial Times. (The Chinese company is burning more cash on a relative basis vs. Uber.)

According to leaked numbers from August, Uber will do around $10.8 billion in gross revenue this year. But remember, it pays out 80% to drivers. The 20% it keeps is net revenue, and that’s the number to look at in a “marketplace” company like these.

So we’re looking at a price for Uber of around 20 times revenue, with heavy losses to boot. Not cheap.

Uber is growing fast too, doubling revenue every six months. But investors seem to be valuing Uber as if global domination were already assured. It’s not. There are plenty of battles left to fight. Very expensive ones.

Like many high-flying companies today, Uber has a bright future. But to go from being valued at $3.7 billion to $51 billion in two years? It’s a bit much.

It makes me wonder, how many of Uber’s seed round investors have cashed out already? The guys who got in at a $5 million valuation…

I’d like to think I’d sell in that situation. It seems reasonable, you know, when you’re up 5,000x* or so.

Have a great weekend.

Adam Sharp
Founder, Early Investing

*a rough guess