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What stands between Uber and success in China?

Shanghai taxi driver taking credit card payment
Karl Johaentges | LOOK | Getty Images

Ride-hailing app Uber is the giant among start-ups, worth a reported $50 billion and a symbol of the excess and ambition in America's tech sector.

But the company's global ambitions have stalled in China, as both a well-funded competitor and government protectionism may relegate it to minor player status.

Its chief Chinese rival is Didi Kuaidi, valued at $12 billion after closing a $3 billion round of fundraising last week. Backers include Tencent and Alibaba, and estimates of their market share in China vary between 60 and 80 percent, making them the clear leader in the Chinese private car space.

Because of Didi Kuaidi's backing—which also includes China Investment Corporation (CIC), the nation's sovereign wealth fund—the company "is better protected in the local market," said Greg Tarr, partner at CrossPacific Capital. Having backing from local government investors is necessary for success in China, he said.

"You can win, but you can't win, is what I keep telling people in China. Uber is so politically savvy and aggressive, I can respect that they're going after it," said Tarr. "When you have great technology and a great business model but don't understand some of those local business premises ... West Coast aggressiveness will only get you so far."

"I think there is this thinking that, 'I expanded to Australia, Singapore and Hong Kong and it should just all work, no problem,' " said Tarr. "China is such a different animal in terms of dealing with the local culture, the protectionism and the fact that you don't have local investors."

Protectionism comes in two primary forms: preference for a rival in legal enforcement actions, and cutting off access to channels that are necessary to growth, said Tarr. (Both Uber and Didi Kuaidi have been targets of government action in the spring of this year for operating unlicensed vehicles.)

Didi Kuaidi's investment from the country's sovereign fund opens up opportunities for them at the expense of competitors, said Tarr. Having local government investors helps a company manage regulations and find loopholes, as well as get access to important people and companies to help growth, he said. The lack of that access can severely stymie a company's ambitions, he said.

The race to grab market share now is crucial because, in China's economy, whoever gets ahead could remain the dominant player by a wide margin, said GGV Capital Partner and Jixun Foo.

"I don't think there will necessarily be a 100 percent market share for one player," said Foo. "But by and large I think the leading, category player will take 80 percent of the market share."

Estimates of Uber's current market share in China vary widely. According to a Q1 report by Beijing research firm, Analysys International, Didi Kuaidi had 78.3 percent of the Chinese limousine market while Uber had 10.9 percent at the end of 2014. Another report—from RedTech Advisors—gives Didi Kauidi about 60 percent market share. (In an investor letter, Uber CEO Travis Kalanick said he believes the company has close to 50 percent share in the nontaxi ride market.

Uber itself says it has grown from 200,000 users in January to 4.6 million monthly average users in June. Five of Uber's top 10 cities are in China, said a spokesperson for the company. (An Uber spokesperson declined to reveal its market share in China, but said it fluctuates enough that a precise number is difficult to determine.)

Like Uber, Didi Kuaidi is also thinking about how cars will work in the future, and is looking at autonomous driving and other benefits of big data, Foo said. They also quietly closed a round of investment in Uber's chief U.S. competitor, Lyft, alongside Tencent and Alibaba.

Uber, meanwhile, has taken a multimillion dollar investment from Chinese search giant Baidu, and had integrated Baidu maps and other services into its app. The company has also diversified in China by launching "People's Uber" where drivers can offer "nonprofit" rides to passengers where only the cost of gas and maintenance is covered. Uber is currently available in 15 cities in China.

Uber's China arm is closing a $1 billion fundraising round, according to Reuters, signs it is ready to keep expanding in the country despite strong competition.

At what point is Uber's costly expansion into China justified? "My gut tells me Uber will have to own 20 percent to justify [CEO Kalanick's] mind share and continued investment," said Tarr.