Is It Possible for Uber and Didi Chuxing to Become Partners?

Up till now, both companies have raised more than $20 billion in funds.

Is It Possible for Uber and Didi Chuxing to Become Partners?

By: Abdullah Saeed Qureshi Published:
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Up till now, both companies have raised more than $20 billion in funds

Uber Technologies and Didi Chuxing’s intense fundraising war in China is finally coming to an end, several analysts believe. According to reports, UberChina’s investors have clearly passed their message to the company, highlighting that it’s time to end the costly fund raising campaign in China.

Sources highlighted that various institutional investors are putting pressure on the US based ride hailing company to enter into a partnership with China’s local ride hailing company, Didi Chuxing, which controls about 90% of China’s market.

Uber has invested billions of dollars to expand in the mainland region and is ready to burn more cash to grab a greater market share. However, analysts and investors see no favorable end to this spending and fundraising. Some believe that it’s like the cold war, and an immediate pause is necessary.

Back in June, CBN highlighted that there is a possibility that the two ride-hailing giants would join hands, as continuous fund raising, worth billions of dollars, leads to no favorable solution. In China, Uber is already burning $1 billion cash per annum to expand its reach and market share. However, in a ride hailing market, it is difficult to sustain customers. To attract customers, both UberChina and Didi Chuxing are also giving hefty discounts, subsidies and incentives to both drivers and customers.

On the other hand, at present, Didi Kuaidi completes about 11 million rides per day, which is expected to increase to 30 million rides and 10 million drivers in the coming year. Additionally, China’s domestic ride-hailing app also indicated that it generated profits in more than 200 cities from the 400 in which it operates. However, Uber has maintained an objective of operating in 100 Chinese cities by the end of this year.

Uber Technologies, valued at about $68 billion, has about $11 million in cash and equity. However, its China business hasn’t been growing according to expectations. This is mainly due to stiff competition from the local Chinese ride-hailing market. On the other hand, Didi Chuxing, valued at $28 billion, has about $10 billion in cash and equity.

As it currently stands, both Uber and Didi Chuxing have generated more than $20 billion in funds from various investors. Moreover, the ride-hailing marketplace is one in which loyalty doesn’t really matter. On the other hand, when it comes to WeChat and Facebook, monopoly can exist because users join the social network to interact with friends and it’s free. But in ride-hailing markets, it is very difficult to retain customers as they tend to go towards those which offer more incentives such as discounts and deals.

News sources also highlighted that UberChina investors have been in talks with Didi’s board members over a potential deal; however, nothing seems certain at present. Bloomberg reported on Wednesday that Bill Gurley, an investor and board member of Uber Technologies, held talks with Didi’s President Jean Liu about a possible tie up a few months ago. However, the companies haven’t announced anything officially as of yet.

On the other hand, several reports claim that the two companies are not yet interested in a potential tie-up. Last month, CBN reported that Liu Zhen, Head of strategy UberChina, denied all such claims, stating that Uber is currently focusing on expanding in China and increasing its market share. She also highlighted that the “ride-hailing app’s business in China is shining and the company is in a great position to continue its swift growth.” She also indicated that Uber is likely to surpass Didi in China next year; however, it is unlikely due to Didi’s vast presence in the country, whereas UberChina still operates in selective Chinese cities.

Similarly, Uber’s CEO Travis Kalanick, who has already termed China as the company’s key strategic club, is ready to invest billions of dollars into the Chinese market. Mr. Kalanick is not fond of huge fund-raising campaigns. He called them “irrational,” but essential if Uber wants to grab a greater share of the Chinese market.

Mr. Kalanick believes that the focus should be on building up the business instead of participating in fundraising campaigns. He has also criticized the company’s domestic arch rival Didi for encouraging such campaigns. Mr. Kalanick opines that Didi is only buying up the market share but is far behind Uber in reality.

Uber and Didi are both backed by leading Chinese investors including Chinese tech giants Baidu Inc (NASDAQ:BIDU), Tencent Holdings Ltd and Alibaba Group Ltd. (NYSE:BABA). 

Another potential roadblock to the tie-up is how the fees and revenues would be distributed, according to some industry experts. Didi, with a greater portion of Chinese market, would definitely demand more revenue share in case of a partnership, while Uber won’t be too happy about that.

Didi Chuxing is also aiming to undergo an initial public offering (IPO) in the US by 2018. Likewise, Uber is also planning to do the same but the company’s China business uncertainties are restricting it to carry out an IPO. Uber generates more than 50% of its revenue from China.

We believe that the potential tie-up is far ahead and the fund-raising war is likely to go on in the days to come, if no other solution is sought. Similarly, Uber’s confidence in the Chinese market despite economic uncertainties is also commendable. Mr. Kalanick also applauded the company’s efforts, saying: “I thought we did remarkably well especially given the macro situation that was going on.”

Several analyst believe that Mr. Kalanick’s goals of conquering the Chinese ride-hailing market and Didi’s 90% market share is not going to lead to a partnership. The market share fight is expected to continue and we believe if any tie-up does take place, it will be Uber who would most likely have to surrender.