Signup for our free newsletter:

Behind The Red Curtain

Written By Brian Hicks

Posted December 23, 2014

What’s the market that no one seems to like but everyone seems to be either investing in or appeasing? The People’s Republic of China.

Although that’s an unusual way to phrase it, it’s intentional. When you invest in a Chinese company, you aren’t just investing in the company itself. At least not in the same sense as when you would invest in a company located in the United States or Canada.

On Alibaba’s (BABA) recent landmark IPO, billionaire investor Mark Cuban said “Alibaba should not have been allowed to be listed in the United States.”

Admittedly owning shares of Alibaba himself, Cuban pointed out that as a Communist country, China isn’t known for its transparency.

“It’s difficult to enforce insider trading laws” in a country that’s almost certainly inventing some of their economic numbers.

Like many of us, the entrepreneur wants to know why Alibaba is listed in the United States while being held to a standard separate from domestic companies. However, that isn’t stopping investments from pouring into the Chinese market at a record pace.

Cuban stated in a tweet, “If China is so strong, why are so many Chinese companies doing IPOs in US markets instead of in China?”

We’re wondering the same thing.

Aggressive Expansion

Baidu (BIDU), the Chinese Google, has announced that it will purchase a stake in ride-sharing giant Uber. The investment will by no means be a controlling share. While it’s speculated that the total numbers around $600 million, the exact amount hasn’t been disclosed.

Robin Li, Chairman and CEO of Baidu, cites a higher calling other than investment alone when questioned on his motives for agreeing to the exchange: strategic and commercial cooperation.

Stated purpose asides, Baidu’s move to claim ground in the nascent but rapidly-developing China’s car-booking industry is likely an effort to displace competitors Alibaba (BABA) and Tencent (TCEHY) who respectively own stakes in KuaiDi Taxi and Didi Taxi.

To secure his position in the emerging market, Li plans to rollout new Baidu functions to help users find restaurants, shops, etc, on their smartphones and tablets in addition to connecting its map and mobile search features with Uber’s service.

Recalling Google’s (GOOG) arrangement with Uber which literally put them on the maps, Google Maps that is, Baidu’s deal with Uber is likely to pan out in the same way. Uber currently operates in 9 cities in China and said this past July that it would hire in and expand to 14 cities total.

Unintended Consquences

Partnering with Baidu will help Uber more successfully penetrate the Chinese market in addition to avoiding some of the regulatory and legal hurdles that have challenged it throughout the world.

New Delhi recently banned the San Francisco-based Uber after one of its drivers was accused of raping a passenger. Following the controversy, complaints have come out of the woodwork resulting in bans being issued in Rio de Janeiro, Spain, and the Netherlands based on comparable incidents.

Uber CEO and co-founder, Travis Kalanick, is likely eager for an opportunity to rehabilitate his company’s image or at least its profit margins after Uber executive Emil Michael’s criticism of journalists, which led to calls for his firing, came to light.

Making Uber’s services more available throughout the world will not only enable the company the achieve further growth but also will show the world which comments made by Uber’s employees are intended to represent the company.

Outside Investment

You’re not likely to know what’s going on behind the big red curtain unless you’re on the inside and that seems to be all right with a lot of people. China has one of the fastest growing economies in the world and one of its biggest companies has now paired with the leader of one of the fastest growing industries.

This month, Uber completed a round of funding raising the company’s value to over $40 billion. Combined with the 500 million monthly active users of Baidu’s growing mobile search service and the 240 million monthly users of its Baidu Map service, even an integration at this level could be enough to give industry leaders, Tencent and Alibaba, cause to look over their shoulders.

As Uber redoubles its commitment to the Chinese car-booking market with this deal, proposed expansion all over China, and the addition of a luxury car service, this is turning out to be an opportunity the international investor might not want to miss. If you can’t invest in Uber, invest in Uber’s investors.