Uber Technologies Finally Gave up on China: Here’s Why

The company sold its china operations to Didi Chuxing.

Uber Technologies Finally Gave up on China: Here’s Why

By: Abdullah Saeed Qureshi Published:
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The company sold its china operations to Didi Chuxing

China’s ride-hailing giant Didi Chuxing said on Monday that it will buy Uber Technologies' China arm “UberChina,” to end the costly battle which has been raging since the past few years. The fundraising war has cost both ride-hailing companies billions of dollars, as they competed fiercely for market share in the mainland territory.

In an official statement, Didi highlighted that it will acquire UberChina’s business, brand and data. In return, the US based ride-hailing giant will get a 5.89% stake in the combined entity with “preferred equity interest equal to 17.7 percent of the economic benefits,” said Didi. Similarly, UberChina’s other major stakeholder, Baidu Inc (NASDAQ:BIDU), will receive a 2.3% stake in Didi Chuxing. In addition, Uber’s CEO Travis Kalanick and Didi’s founder Cheng Wei will join each other as part of board of directors. Moreover, the combined entity will be valued at $35 billion, according to Bloomberg which cited sources close to the matter.

The decision to merge came after both ride-hailing giants were legally allowed to operate in China. Earlier this week, the Chinese government issued new national guidelines to promote and grow the ride-hailing business in the country. However, rumors regarding a truce between the two ride-hailing giants were making rounds since the past few months.

Last month, reports emerged that Uber’s investors are pushing the company to enter into an alliance with its Chinese rival, in an attempt to end the fundraising war, which cost Uber more than $1 billion a year with no significant benefits. The company burned billions of dollars in order to expand into the lucrative Chinese market, which also constituted more than 50% of Uber’s revenue. However, UberChina’s investors’ see no satisfactory end to the spending spree and irrational fundraising. Some of Uber’s institutional investors termed this fundraising fight a “cold war,” as both companies were engaged in a market-share race.

Back in June, CBN highlighted that there is a possibility the two ride-hailing giants would join hands, however, both companies denied any such news, indicating that their businesses are growing better than expected. In the costly fund-raising fight to buy up market share, both companies raised more than $20 billion from various private and institutional investors. However, no clear winner emerged.

Uber Technologies, with a market capitalization of about $68 billion, has about $11 million in equity and cash in its pockets. However, its China operations didn’t grow in proportion to the cash invested. Didi, on the other hand, was valued at about $28 billion and has about $10 billion in equity and cash.

The merger seemed certain to some market experts for some time now. Since Didi enjoyed more than 90% of the Chinese ride-hailing market share and government support, UberChina would have been unable to stand shoulder-to-shoulder with its Chinese rival in the long-run.

In June 2016, Liu Zhen, Head of strategy UberChina highlighted that the company’s CEO Mr. Kalanick was satisfied with Uber’s position in the Chinese market and rejected all such claims of a tie-up. She said: “UberChina business is shining and the company is in a great position to continue its swift growth. Also, Uber is likely to surpass Didi in China next year.” However, as the situation stands, it is quite evident that Uber has given up on China.

Didi Chuxing’s CEO highlighted that both companies have gained valuable lessons from each other in the past two years. He further added: “This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level.”

Moreover, Didi Chuxing, which is backed by Alibaba Group Holding and Tencent Holdings Ltd, operates in almost all Chinese cities. Recently, tech giant Apple Inc also invested $1 billion in the Chinese ride-hailing app, causing its valuation to surge even higher. Uber, which is operational in about 17 Chinese cities, faced immense pressure from its investors to sell of its China business, which has already cost more than $2 billion to the US based ride-hailing app.

Mr. Kalanick, who previously emphasized on China being a “key strategic hub,” has now finally given up, several analysts believe. He said in an official blog: “As an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart. Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there.”

With Uber’s long fight for survival in China finally coming to an end, analysts have raised questions over foreign tech companies making a successful entry and expanding its business in the world’s second largest economy. Companies like Alphabet Inc, Microsoft, Qualcomm and others have faced difficulties and obstacles in expanding their business in the country. However, most of them rely on China, as it counts for a large chunk of their revenue. Likewise, we believe Uber Technologies was poised to lose against Didi as it received support in different forms from the Chinese government.

The consequences of the merger between the two ride-hailing giants are yet to be seen. However, it’s not all doom-and-gloom for the US ride-hailing company as it still has a share in Didi, which is poised to rule the Chinese market. We believe that Uber should learn from its venture in China and should now focus on capturing other lucrative markets.