Uber’s China deal with rival Didi Chuxing: Sorry surrender or savvy sale?
Mon., Aug. 1, 2016
BEIJING – Did Uber just win or lose in China?
That’s the multibillion-dollar question hanging over the San Francisco-based ride-hailing company following news Monday that Chinese rival Didi Chuxing would acquire Uber’s brand and operations in the world’s most populous country.
In some ways, the deal has the smell of surrender. As the headlines broke, some analysts saw a repeat of the attempts by American tech powerhouses including eBay, Google, Facebook and Twitter to enter China, only to be tripped up by fierce local competition, their weak understanding of the market, or a hostile regulatory environment – or all of those factors combined.
But others say Uber’s strategic throwing-in of the towel may pay off big. Uber and the backers of its China operations will hold a 20 percent economic interest in the merged company. Some likened the deal to Yahoo co-founder Jerry Yang’s move in 2005 to buy a 40 percent stake in then-fledgling Chinese e-commerce company Alibaba for $1 billion – an investment that was worth $20 billion a decade later.
And they noted that the if-you-can’t-beat-’em-join-’em approach means Uber can stop spending piles of cash fighting an uphill battle for riders and drivers in China, and focus its energies elsewhere.
“By either strategy or luck, Uber played this beautifully,” said Jeffrey Towson, a professor of investment at Peking University and author of a book on Chinese consumers. “Eighteen months ago they were written off in China – too small, too late and a foreign Internet company in a political market. But they surprised everyone by continually doubling down and using their money and technology in a powerful way.”
That doubling-down didn’t come cheaply – Uber’s chief executive, Travis Kalanick, famously said the company was losing $1 billion annually trying to grab market share.
It wasn’t all for naught: The company said six of its top 10 cities by ride volume are in China, and its China business gave investors hope for future growth.
But in the first quarter of 2016, Didi Chuxing – which was formed in 2015 by the merger of two Chinese rivals – ranked No. 1 in China with a market share of about 85 percent, while Uber was No. 2 at about 8 percent.
Still, Uber attained what Towson called a “solid No. 2 position,” leaving Uber and Didi Chuxing left with two possible outcomes – a continued war of attrition or a merger that would give Uber a minority stake in the China winner.
“I see it as spending 1 year building up a strong negotiating position, and then doing the deal they probably always wanted,” Towson added. “Winning in China was probably plan A. Doing a deal with Didi from a position of strength was probably Plan B. This is probably their best possible outcome.”
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