Why Uber had to abandon 2 big international markets — Russia and China

Krystal Hu
Reporter

The ride-hailing app Uber has been plagued by allegations of gross mismanagement and sexual harassment, but those aren’t its only problems. It’s been having trouble in overseas markets, first in China and now in Russia.

One year after the San Francisco-based company sold its Chinese business to the domestic rival Didi Chuxing, Uber announced on Thursday that it would merge its arm in Russia with Yandex (YNDX), the local internet giant. Uber entered the Russian market in early 2014, three years after Yandex launched its own ride-hailing business Yandex.taxi.

As the world’s dominant ride-hailing company, Uber operates in more than 600 cities across the globe. The business faces stiff competition from local players when it comes to price wars, cultural differences and regulatory limitations.

Uber’s close races with local rivals

Uber taxi in Moscow. (Wikimedia)

Uber and its local rivals have invested enormous resources into the price war to fight for market share. In the ride-hailing industry, customers and drivers easily switch apps for either lower cost and higher pay. Moreover, the “sharing economy” turns out to involve not only sharing cars, but also customers and drivers. About 20% drivers work for Uber and Yandex at the same time, Yandex said on a conference call on Friday morning.

Price competition in international markets can be fierce. Last September, Yandex cut its minimum base fares from 199 to 99 Rubles ($1.60) to compete with Uber’s 50 rubles and lowered the cost for every kilometer to 9 rubles compared Uber’s 8. This April, Uber announced that trips to and from Moscow airports would begin at a fixed rate of only 700 rubles ($11), about a third lower than its competitor.

Since entered the price war, Yandex.taxi reported an operating loss of 2 billion rubles (about $330 million). Yandex, which has a market cap of nearly $10.3 billion, dominates the search space in Russia and operates various businesses from email to music. It has much more financial flexibility in capturing market share by spending than Uber, which has so far invested $170 million in its Russian unit.

Those financial limitations may have also explained why Uber would give way to its Chinese competitor Didi months after its former CEO Travis Kalanick said the company burned more than $1 billion a year in China. The red-hot competition once made fares even cheaper than public transportation, according to my experience of living in Beijing in 2015.

Backed by China’s two largest internet giants, Alibaba (BABA) and Tencent, Didi acquired Uber’s operations in China in last August, leaving Uber more resources to explore other emerging markets like India and Brazil.

Cultural barriers and government regulation

People walk out of the headquarters of Didi Chuxing in Beijing, China, May 18, 2016. REUTERS/Kim Kyung-Hoon

Money may be not the whole story, though. Entering markets like Russia and China is never easy for US companies, given the language barriers and government regulations and the fact that local governments often favor domestic players. That’s why you can see the growth of Google of Russia, Yandex and the Google of China, Baidu.

China, for example, applies extra scrutiny to US tech companies like Apple (AAPL), The New York Times reported last year. Russia is even explicit in supporting its domestic technology companies. Last July, President Vladimir Putin signed a law to put 18% value-added tax on electronic goods and services provided by foreign tech companies. Uber passed the cost of that tax on to its drivers, which caused some of them quit and turn to Yandex, according to Bloomberg.

In addition to having a home-field advantage with the government, Yandex’s brand may also have more cachet in Russia.

“Yandex is more trusted by people in Russia,” Aleksey Kuleshov, a 32-year-old customer of Yandex.taxi in Moscow, told Yahoo Finance. “It’s big native company. The existing authority of Yandex is very high.”

In light of all of these hurdles, Uber may think twice about fighting with domestic competitors in the global battlefield.

Krystal Hu is a reporter at Yahoo Finance. Follow her on Twitter.

Read More:

Meet the Harvard Business School professor who’s going to try to fix Uber

Think you’re buying on Amazon? It’s actually from Alibaba

Amazon: We hire no extra workers for Prime Day, it’s just like any summer sale