This is a typical example of what had happened in Spring and Autumn and the Warring States (春秋戰國時代) in China, the former one was from 722 to 481 BC and the latter one was from 403 to 221 BC. The Chinese have been practicing this since then and have not stopped. They applied to warfare by then but it is now applying to the modern world and for the business they have been successful as well.
We can use this as the case study for what happened with Uber and its archenemy Didi, and both are car-hailing companies. The two rivals have poured billion of dollars into subsidies for their passengers and their drivers for the market share in China. Both raised money to fund the battle and Didi raised more than $7 billion in debt and equity and a month later $1 billion from Apple. Uber raised $3.5 billion from Saudi Arabia’s sovereign wealth at the same time and issued $1.15 billion in high-yield debt.
Uber’s strategy in China has relied on the heavy subsidy for the rides. Uber was losing more than $1 billion a year in this practice. Then both were under the pressure from their financial backers to do something to reduce the loss.
This was not new to Didi in making the deal with the competition and In February 2015 announced a $6 billion deal consolidated with Kuaidi Dache to form Didi Chuxing.
Uber has the presence in China in 60 cities and is doing 40 million rides per week, whilst Didi is in 400 cities and has 100 million rides per week.
Uber has agreed to sell its Chinese operations to rival Didi Chuxing. This deal marks the latest retreat by a US technology company from a market where most of the western Internet companies had “failed to crack the code” as acknowledged by Travis Kalanick, who is the Chief Executive of Uber.
Others like Google shut its China search engine in 2010 over censorship concerns and Facebook and Twitter are both blocked from the country.
With the deal Uber will receive a 5.89% direct stake in Didi including a share of the future profit equivalent to 17.7%. Didi will also invest $1 billion in an equity stake in Uber.
The battle had been going on for two years and collectively the two companies raised $25 billion between them. In this business the company with the most drivers and passengers win the battle. They came to realize the subsidies are unsustainable. Uber’s competitor in the US, Lyft who is a smaller competitor of Uber may follow by cutting the fare and Ola from India who is already locked in a heavily subsidized fight with Uber India.
The agreement not only effect a financial transaction but also a strategic alliance and both companies are taking seats on each other’s boards. Didi also took a stake in Uber’s competitor, Lyft last year would have created an awkard situation.
Uber has earned a reputation for its hard-scrapping business style, operating independently and aggressively as it is entering into a new market. It could be a delicate situation if Didi is deciding to expand outside China, which currently is its only market.
Uber has freed up its resource and will focus on new technology investments such as the driverless cars.
Uber may say that after the attempt to conquer the China market, Uber succeed to walk away with much less than first hoped for and win also a graceful exit from a battle in China.
Not only Google, Facebook and Twitter have fallen foul of Chinese censors and been blocked, eBay and Yahoo were also defected. We saw Apple ran into a series of setbacks this year and China is no longer their second largest market.
The exit of Uber could probably be the best exit from China than any US company has gotten. Didi’s president Jean Lau said that, “Uber has done better than any Silicon Valley company in China,” when she was announcing the deal. She continued to say that, “We raged an earth-shaking war and when we join hands, our love will last till the end of time.”
This was what we read from the newspaper on Tuesday, 2 August but on Wednesday, 3 August we read that before the deal Didi had been playing the key role and investments in a global anti-Uber coalition with Lyft in the US, Ola in India and Grab in Southeast Asia. Now with the deal with Uber they have all to see how the partnership relationship will happen.
The story goes on …….
Acknowledgment: FT Tuesday, 2 August and Wednesday, 3 August 2016