What Uber’s decision to merge its China business with Didi Chuxing signals about its strategy
Uber is surrendering to its chief Chinese competitor Didi Chuxing by merging its local business with the rival in a $35 billion deal, Bloomberg reported early Monday morning. The deal means that Uber has finally conceded there is a limit to its aggressive expansion strategy, indicating there will likely be more deals like this in the near future.
According to Bloomberg, the dynamics of this massive deal are somewhat obscure. Uber and its investors are taking a combined 20% stake in Didi, while Didi itself is making a $1 billion investment in turn into its former rival at a $68 billion valuation (Didi itself is valued at $28 billion).
“As an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart,” Uber CEO Travis Kalanick apparently wrote in a blog post that Bloomberg claims to have gotten a hold of before publication. “Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there. Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term.”
The big surprise is that Uber conceded defeat and compromised. It is not shocking that Didi made China an unwinnable market for Uber. Rumors of the deal first appeared at the end of June as investors had been pressuring Kalanick to cut losses and make the most of the Chinese market that he could (Bloomberg reported last month Uber had $11 billion of cash on hand, while Didi had $10 billion). Uber has lost at least $1 billion, perhaps $2 billion, from trying to cut into the Chinese market. Didi is far too strong, with a presence in over 400 cities versus Uber’s 20. That actually makes the deal somewhat odd, but only from the perspective of the insular Chinese market. In theory, Didi now has some access to Uber’s reach abroad.
The deal breaks with Uber’s traditional conditions for investment
That brings us the second surprise here: Didi is now actively undermining or exploding its business relationship with Lyft (as well as Ola in India and Grab in Southeast Asia). Those four Uber rivals had aligned to create a rideshare equivalent of the Star Alliance of airlines. The four companies have been integrating their apps so customers visiting partner markets can book Lyft through the Didi app, or Ola through the Grab app, etc.
That alliance and its investors also stood in stark contrast to Uber, which has long dictated that its investors may not invest in rival companies. No investor in Uber has interests in Lyft or vice versa. The terms were so extreme that it even forced electronics manufacturers and car companies to choose one side when investing in autonomous vehicle projects.
That complex web included Google, Tesla, and Baidu maintaining interests in Uber, which forced automotive partners like BMW, Porsche, Daimler, Toyota and Volvo to avoid interests in the companies investing in the Didi-Lyft alliance. Didi, GM, Tencent, Rakuten, and Alibaba had all invested in Lyft, with Apple and Alibaba also investing in Didi. The web becomes more complex when you include Microsoft, Bosch, Jeff Bezos, Audi, Delphi and HERE, which all were linked to Uber investors and to no Didi-Lyft partners.
The scope here might be a limited change in terms. Do not expect Uber’s American investors to suddenly have the freedom to diversify holdings and grab any interest in Lyft now, as well.
Will Uber cut back in other big markets?
The announcement coincides with China’s formal legalization of the ridesharing industry. It would have been helpful for Uber to keep growing in that direction, but Didi Chuxing’s advantage would also have been more difficult to beat in an open market.
After this, will Uber cut back in other big markets outside North America like India? The two rivals have both been hampered by local regulations, but Ola CEO and Founder Bhavish Aggarwal still has home field advantage and more locations than the international startup. WhichApp this past January estimated Ola had twice as many downloads as Uber in the country. As of February, Uber was in 26 cities while Ola was already in 102 locations and looking to double.
Uber recently nabbed a $3.5 billion investment from the Saudi Arabia sovereign wealth fund, much of which is dedicated to spending in the subcontinent. Investors perhaps should be worried that extra money won’t be put to better use in some other endeavor, like Uber’s mapping scheme with partner DigitalGlobe.
It will be difficult to discern how Uber might translate a truce like the one with Didi to other markets until the full details of the deal are made public. That being said, a number of smaller competitors also exist around the world like Careem in Muslim markets and Cabify in Spain and Latin America (which recently raised $120 million itself). But look for Uber to find ways to modify its aggressive approach to new markets as the pressure of slowed investment markets pushes investors to demand more smart spending from their ridesharing juggernaut.