Uber entered the Chinese market in 2013 retreating in 2016, losing ~$2B but leaving with a $1B equity investment from and 20% stake (valued at $7B) in DiDi, as well as a DiDi board seat for CEO Kalanick.

Why did they and so many other companies fail to enter the Chinese market? Guanxi is the Chinese practice of mixing personal relationships and business, a practice that runs counter to the “arm’s length” business relationships of the United States.

According to Prof. Edwin C. Nevis of MIT’s Sloan School of Management, the Chinese “hierarchy of needs” places guanxi before basic needs such as food and shelter. These basic differences in culture, along with confusing government regulations and weaker legal systems make it difficult for American companies to succeed in China.

Not only was Uber forced to retreat, but China is also growing its own global powerhouses, taking the battle out of China and into emerging markets such as Africa and Latin America. Another looming blow to Uber, DiDi is now looking to invest $100M in Brazilian Uber rival 99 (formerly 99Taxi).

The United States has led in technological innovation since World War II. The American-centric attitude towards tech development can be summarized in this strategy: “make it popular in the U.S. first and then ship it globally”. For many years, for example, American brands such as McDonald’s and Kentucky Fried Chicken were luxury items and were seen as a nice place to take someone on a date.

However, American brand superiority is shifting with domestic powerhouses such as WeChat, Baidu, Tencent, Alibaba and recently DiDi DaChe. Facebook competitor and a Chinese rockstar tech company, WeChat is the most used messaging, payments, and news network used by over 846 million users each month. Because of technology leapfrogging with regard to mobile communications infrastructure and financial institutions, you can pay your rent from WeChat - something that is unheard of in the United States.

Not only is China growing domestic powerhouses, but grassroots innovation is taking hold in places such as Shenzhen for hardware and Beijing for internet companies, with the capital city beginning to toe the line with Silicon Valley in terms of startups entering the marketplace. With 712 million netizens and only 50% internet penetration, there is tremendous potential for domestic innovation and growth.

Famous for it’s walls, China has been historically very protectionist over its market and country. The Great Wall of China, built in ~1300 AD, was erected to protect the country from Mongol invaders. In 2006, the Great Firewall of China was established, protecting the country’s data and minds from foreign companies and influence. Foreign businessmen and students alike survived by using Virtual Private Networks (VPNs) to send and receive emails or check social media from blocked companies like Google and Facebook.

Now, however, it seems as if the roles may be shifting. As the President of the United States Donald Trump drives the country into a protectionist trade era, he is countered by President of China Xi Jinping who warned that “pursuing protectionism is like locking oneself in a dark room. Wind and rain may be kept outside, but so is light and air.”

While no moves have been made to remove the Firewall or lighten up on data security, the seeds for parting the curtain are being sown, evidenced in pursuing open markets and the beginnings of strong Chinese internet innovation centers.

What does that say for American brands? China may not only compete on reverse-engineering and rapid, low-cost production (aka, stealing your IP and ‘Made in China’) - but she may also begin competing on the scale of brand, design, and innovation.

America, it’s time to step it up.