Chinese search giant Baidu (NASDAQ:BIDU) plans to invest up to $600 million in ride-sharing service Uber, according to Bloomberg. That's a big vote of confidence for Uber, which has recently been hit by PR debacles regarding its recruitment methods, driver screening, arguably sexist promotions, and vows to probe for journalists' dirty laundry. Bans of the service in certain jurisdictions, including the entire nation of Germany, have also throttled its aggressive expansion plans.
Yet Uber continues to rake in investor dollars and grow rapidly. After raising another $1.2 billion in funding earlier this month, the company is now valued at about $40 billion. Internal reports show that Uber's annual revenue is growing at roughly 300% per year and could hit $1.5 billion to $2 billion in 2015. The service is now available in 230 cities worldwide.
So what could this partnership between China's largest search engine and the fastest growing ride-sharing service in the world mean for China's taxi industry?
Why Baidu needs Uber
Baidu holds a 52% market share in search engine page views in China, but accounts for 82% of nationwide search revenue, according to market tracking sites CNZZ and CIW.
Meanwhile, the Chinese ride-sharing market is dominated by two apps -- Kuaidi Dache and Didi Dache -- which are respectively backed by Internet giants Alibaba and Tencent. Kuaidi and Didi, which each control roughly half of the market, engaged in an aggressive pricing war over the past year. That competition, which pumped out increasingly lavish incentives on drivers and subsidies for riders, ended in a truce in August.
With the market split between two cab-hailing services, it might seem futile for another company to jump into the mix. But Uber launched its app in Shanghai, Guangzhou, Shenzhen, and Beijing earlier this year. So far, Uber is not very popular -- its app ranks 25th in travel and 459th overall in China's iOS App Store, according to App Annie. By comparison, Uber ranks first in travel and 27th overall in the U.S.
If Uber gains traction in China, however, Baidu adds a lucrative service to its mobile ecosystem, which might generate higher mobile search and display ad revenue. Last quarter, Baidu's mobile revenue accounted for 36% of its top line and surpassed its PC revenue. Its primary rival in search, Qihoo 360, recently admitted that its mobile monetization efforts remained in the "early stages."
Why Uber needs Baidu
Unlike countries such as Germany which banned Uber outright, China's taxi drivers have embraced ride-sharing apps, making it a much tougher market to enter.
Uber dominated several large cities in the U.S. because taxi drivers either had no apps, or their "unified" apps were less convenient than Uber's offering. On the other hand, taxi drivers in China's urban centers have mostly aligned themselves with either Kuaidi Dache or Didi Dache, primarily because the companies don't take a cut of the drivers' fares. Both generate revenue from a small commission on mobile data services (collected from the wireless providers) used to access the apps. Kuaidi and Didi also employ a controversial tipping system during peak hours, which allows users to bid on a limited pool of drivers with promises of higher tips.
By comparison, Uber takes roughly 20% of a driver's fare. If Uber keeps charging its "luxury ride" 20 RMB ($3.23) base rate in China, compared to the 10 RMB ($1.61) base rate for local cabs, that 20% commission probably won't matter. But if Uber lowers its prices again (as it did from 60 RMB to 15 to 20 RMB earlier this year in Shanghai) to remain competitive, drivers may not be so cooperative.
Uber also needs Baidu as a national launchpad for its app. Tencent already uses WeChat -- its popular mobile messaging app with 468 million active users -- to directly connect passengers to drivers via Didi Dache. A partnership with Baidu might funnel some of the search giant's visitors to Uber's cars.
It will be tough for Uber to establish a significant market in the Kuaidi/Didi duopoly. Baidu's backing will help, but Uber will have a tough time moving down market to compete with local cab companies if it maintains its 20% commission. In July, Kuaidi announced that it would buy a fleet of BMW 5 Series and Audi A6 sedans to move upmarket to compete against Uber as well.
Moreover, critics claim that smartphone taxi hailing apps make it hard for older people and those without smartphones to flag down cabs by the side of the road. That concern led Shanghai in April to ban the use of smartphone taxi apps during rush hour. Similar prohibitions in other cities could also hurt Uber. If the company defies those odds and starts stealing market share from Kuaidi and Didi, the Chinese government could also intervene with an anti-monopoly probe, as it did recently with several foreign companies.
Therefore, it's unlikely that Baidu and Uber's partnership will disrupt the ride-sharing app industry in China. For Baidu, it should be an interesting side project. Uber might manage to carve out a niche share of the Chinese market, but it's hard to see it disrupting the entire industry as it did in the U.S.
Leo Sun owns shares of Alibaba. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.