As we learned this past Monday, Uber has decided to sell its China operations to China’s largest rideshare company, Didi Chuxing. Didi Chuxing, which is part owned and backed by AliBaba and Tencent and recently received a $1 billion USD investment from Apple had been engaged in a fierce turf war with Uber in China and seems to have won that battle.
Uber throws in the towel
We had all seen various reports that Uber was losing over a billion dollars a year operating in China. It appears Uber has decided that the China market will remain impossible to crack in the face of a competitor with such deep pockets (Alibaba and Tencent are worth almost a half a trillion dollars) with stronger local connections. This will allow Uber to focus on other markets where it feels it has a stronger chance of success.
According to a report from Bloomberg, there were also concerns from investors about the business that would have held up any eventual IPO.
The truce brings to an end a bruising battle between the two companies for leadership in China’s fast-growing ride-hailing market. Uber has already lost $2 billion in China in two years there, people familiar with the matter have said, prompting investors to pressure the company to cut a deal. As part of the arrangement, Didi will invest $1 billion in Uber’s global company, people familiar with the matter said.Uber has said that it’s profitable in the U.S. and Canada, but losses in developing markets have undercut that hard-fought progress. The huge losses in China have been one of the main sticking points holding up Uber’s potential IPO, according to people familiar with the matter.
“The biggest existential threat to Uber over the last two months was that in China they were losing capital in a way that potentially threatened the rest of their worldwide operations,” said Arun Sundararajan, a New York University professor.
“The fact is that in the short term it may seen as a loss, but in the long run it’s a good move. Now they can focus on the rest of the world.”
With China settled, Uber can turn to other countries where it’s fighting for market share, such as Grab in Southeast Asia, Ola in India and Lyft Inc. in the U.S.
Didi is buying Uber’s brand, business and data in the country, the Chinese company said in a statement. Uber Technologies and Uber China’s other shareholders, including search giant Baidu Inc., will receive a 20 percent economic stake in the combined company. Didi founder Cheng Wei and Uber Chief Executive Officer Travis Kalanick will join each other’s boards.
“Didi Chuxing and Uber have learned a great deal from each other over the past two years,” said Cheng, who is also CEO, in the statement. “This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level.”
Didi’s valuation after the deal will be $35 billion, said people familiar with the matter, asking not to be named because the details aren’t public. Uber was last valued at almost $68 billion and the arrangement has “removed the big roadblock for an Uber IPO,” Sundararajan said. “Losing money in China would’ve given many pre-IPO investor pause.”
Uber will hope to successfully now file for an IPO in the near future as well as concentrate on its core business in America.
Consolidation to come in the U.S market?
Given the recent slowdown in investing for on-demand start ups we could well see smaller companies being acquired in order to erase competition, and allow prices to rise in order to stem driver attrition. This should erase a major headache for Uber and hopefully result in an improved Uber experience in the U.S; especially from the Uber driver’s perspective.
What do you think? Is this a good move by Uber? Email us!