A Case Study into Failed Market Entry
Updated: Sep 4
Virtually all companies want to expand well beyond their native market, and a few even start directly in a market outside of their HQ location from day one. Tech companies, especially software companies, have a unique advantage with economies of scale. Eventually, if a company is doing well in a given market, the outfit will naturally start to think about expanding into new markets where they can acquire new users and grow the business. In product, we often refer to this process as i18n, or internationalization. Unlike physical goods, where there’s a clear history of process (customs, export laws, etc.); there are different challenges in software. The start of this i18n process in software is picking the next market.
Deliberately picking a market to expand into is both a science & an art, and requires a lot of thought before pulling the trigger. i18n itself is a much longer process, including everything from deciding if you need boots on the ground & recruiting a country manager, to translating strings & culturalizing your service for a local audience. Let’s take a look at the start of this process, and use an anecdote as a case study to illustrate the perils of picking the wrong market at the wrong time. I’ll spend no time on the more documented science of market nuances (market sizing / TAM, local infrastructure analysis, etc.), instead focusing on the art of picking a market (local customs & culture, competitive landscape, etc.), and the perils of being wrong.
Uber’s expansion to China
Uber entered the China market with guns blazing in 2014. The company had grand plans for global dominance in the ride hailing space. But the truth is that the ride hailing game in China was already over by then. I spent a great deal of time working in China in 2016, and got to speak with many locals about the conditions that led to Uber’s quagmire there.
Didi Dache was founded in 2012, as was Kuaidi Dache. Uber didn’t land in China until 2014, the same year in which Alibaba invested $100M into Kuaidi. At the very beginning of 2015, Tencent quickly followed suit, plowing $100M into Didi. What did these two China tech giants, Tencent & Alibaba, see in these fledgling companies? The payment mechanism and affiliated purchasing data for hundreds of millions of people in China.
The war between Didi & Kuaidi was really a proxy for the bigger battle looming between Tencent & Alibaba. Tencent needed WeChat Pay at the forefront, while Alibaba was obviously pushing AliPay. That was where the real battle was happening, and the stakes were high. Tencent and Alibaba were competing for share of wallet supremacy in China. The two giants had balance sheets that enabled them to deal with problems such as massive driver fraud, and they could endlessly subsidize trips for riders if this meant that they’d “win” out the proxy ride-hailing battle (and ultimate control over the wallet).
Uber had an outstanding team based out of China, and the company made many smart moves while there. From what I’m told, the team was relentless in their execution, consistently working with the famed “996” ethos. Uber didn’t get out-hustled. By 2014, it was simply too late to compete. As noted above, Uber didn’t really start to get off the ground until 2014 - but Didi and Kuaidi had already been going toe to toe with one another (not to mention other local players) for more than 2 years by that time. In the battle to win a local market, especially one where protectionism & censorship run hand in hand, 2 years is a lifetime.
That’s not to say there weren’t local missteps from Uber along the way. For instance, Uber started off using Google Maps, which wasn’t nearly as comprehensive nor as accurate for China as Baidu Maps. To Uber’s credit though, they moved quickly to replace Google Maps with Baidu Maps. Perhaps even more impressive, Uber found a big brother on the local playground and took a $600M investment from Baidul directly (which also included integrations like “pickup pins” for Uber in the widely used Baidu Maps app). By 2016, after 2 years of fighting, Uber had already spent over $2b trying to conquer China. It was becoming a fool’s errand, and a seemingly endless money pit. Later that same year, Didi had raised another $7b, bringing its cash on hand to more than $10b. There was no end in sight to how much cash could be burned to win this game.
Uber played hard, and one could easily make the argument that they exited with a win: Uber’s ~15% stake in Didi was estimated to be worth ~$8b as of early 2019. Not bad for two years of work in one market.
Local Circumstances & Caution in a new Market
The truth is, even if the proxy battle between Didi & Kuaidi hadn’t been raging, China’s government is not willing to let a foreign data service into the country. The national security risks are too high in the eyes of the CCP.
The CCP is willing to let physical foreign products with no digital “footprint” into the market. Just take a stroll down Nanjing Road in Shanghai, and you will see an endless stream of western companies like McDonalds, Starbucks, Nike, Burberry, and more all finding great success there. But no data from these products “goes home”.
There are some quiet examples of software players finding success in China. And to the point above about digital “footprints”, these companies have a theme to them: they’re enterprise companies, and their products enable on premise deployment (i.e. no data is sent back home to HQ). When I spent time working & living in China, it appeared that companies like Oracle, NetSuite, SAP, and other enterprise players had some moderate successes there. These are self-contained products; on premise examples of data not leaving the country.
But even that is quickly changing now, as escalating political tensions between the current US administration and China are rapidly accelerating a “Buy China” mandate. Startups that might have been using Oracle & IBM previously are moving to AliCloud and Tencent Cloud; not to AWS or Azure. And those startups in the consideration phase? They’re moving straight to local cloud players.
There was a time when US technology startups very much fostered hopes of going to China and finding a market for their product. At the same time, those tech startups were eager to learn about China. After seeing Microsoft get repeatedly pirated, Google get hacked in “Operation Aurora”, and countless services get blocked in the name of censorship (Instagram, Twitter, Facebook etc.) - that hope is gone, and China is a mostly closed ecosystem.
While the learnings are important, and the market should continue to be studied (the behavioral trends and how consumers in China engage with software is absolutely fascinating), it’s simply not relevant as an opportunity to most of the broader technology landscape outside of China. I don’t think we’ll see Zuck running through the streets of Beijing again anytime soon.
Being able to grok the local nuances in the China market can make a landing team’s head spin - and that’s just one market! It doesn’t stop there, either. If you want to acquire daily active users, places like India & Indonesia can be very appealing. If you’re in consumer software though, the LTV of a customer is going to be far lower there, and consequently the economic impact of market expansion can be less appealing unless you’re playing a very long game. Looking at Southeast Asia broadly? There’s deep fragmentation there between countries; everything from language dialects to different cultural orientations. Thinking of the EU? The laws & regulatory standards there are far more intense than most other regions. Even more so if you’re looking at specific markets, where in places like Germany your user operations team might be ordered to take down certain historical content should users share or post about it. Think exporting Americana content is a silver bullet? We tried that at Pinterest in the early days in markets such as Japan & France - the approach went over like a lead balloon. When we did user research in market, participants (regardless of their location) gave us the same narrative: “this is an American app, it’s fun but not for me.”
Picking a market to expand into with your offering can be a daunting & highly complex task, and you should take the time to apply deep due diligence. Else you could end up in an expensive losing battle where your time, money, and effort would have been far better spent elsewhere. ****************************** Much thanks to Annand Sharma & Eusden Shing for proofreading and providing feedback.