A year ago, no one would have predicted a tie-up between Didi Chuxing and Uber Technologies, as they were competing fiercely to get a greater slice of the Chinese ride-hailing market. However, a lot can change in one year’s time.
Earlier on Monday, Didi Chuxing said it will acquire Uber’s China operations, valuing the combined entity at about $35 billion. The US based ride-hailing app finally gave up on China after a costly fundraising war, which lasted for more than a year. In total, both companies raised about $20 billion in the past two years, however, none of them gained the desired monopoly they wished for.
Travis Kalanick, Uber’s CEO 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.” Mr. Kalanick, who was focused on building up the business, has also changed his strategy to profitability, primarily due to pressure from the company’s institutional investors.
Many analysts were of the view that Uber finally gave up on its China operations by selling its operation to Didi. However, others believe that the merger has given the US ride-hailing company an opportunity to enter other developing markets like India, Thailand and Singapore. After the deal, Uber said that it will re-deploy 150 engineers from the mainland region to other key strategic hubs in Southeast Asia.
In addition, the company will also incorporate new features such as bringing in new mapping technology to enhance user experience in the region. Sources said on Tuesday that Uber will invest $500 million on its new mapping technology, which is likely to end its reliance on Google Maps. In developing markets, Google Maps isn’t always reliable and accurate, hence the need for change.
Moreover, the tie-up with Didi will also free up a lot of capital and other resources, which can be invested in other emerging markets, especially India. Presently, the company has a workforce of about 8,000; divided into marketing professionals, engineers and others. Uber can make effective use of such a workforce to expand in other markets. In the past two years, Uber has wasted more than $2 billion dollars in China without any significant progress.
In India, Uber’s main rival will be Ola, which owns a greater share of the Indian market with full financial support from SoftBank. With Uber entering into a deal with Didi, it is likely that both the companies may have signed a “non-competing” agreement for international markets. Sources have also highlighted that under the merger deal, it is also possible that Didi would not be allowed to invest directly in international markets where Uber operates. This means that Ola will receive very limited support from the Chinese ride-hailing giant if Uber enters the Indian market.
Though shifting to Indian market might bring fruitful results for Uber, it can also incur heavy cost. In India, other modes of transportation are available and that too at very low prices. To expand in India, Uber would have to provide more discounts and incentives then it did in China.
Pperating at a subsided rate in China cost Uber $1 billion a year, and could cost more in India. However, it might be beneficial in the long-run if it manages to grab a big slice of the market. According to reports, in 2015, Ola lost more than $119 million in India after it provided subsided rates to its customers.
But we believe that Uber can afford to take the risk as it has a big bank account. Recently, Uber raised about $5 billion from the Saudi government institution and will receive about $1 billion from Didi under the terms of the deal. The cash can be used to expand its business in emerging markets. Moreover, in India, the company might not have to face strict rules and regulations like it did in China.
It also important to note that Uber’s loss in China gives a clear message to other local competitors that the company can be defeated. Grab Singapore, a dominant name in the Southeast Asian ride-hailing market, is confident that it can beat the US based ride-sharing company once again. Grab CEO Anthony Tan said in a statement, “With the deal in China, we expect Uber to turn more attention and divert resources to our region, they’ve lost once, and we will make them lose again.”
The merger between Uber and Didi still has needs to be approved by Chinese regulatory authorities. Earlier on Tuesday, the Chinese Commerce Ministry also confirmed that the deal has not received the green single yet. Similarly, Chinese anti-trust regulator Mofcom also said: “no application has been received in order to give a green signal to the deal. No merger filing has been filed till now and such transactions have to be filed in advance. If they are not filed, merger between the two companies cannot be carried out.”