05 August 2016

Uber quits battle with Chinese rival Didi Chuxing

This week, taxi booking application (app) provider Uber Technologies agreed to offload its China unit to Didi Chuxing, which intends to integrate with the business upon closing. Internet giant Baidu is among the sellers participating in the deal. Under the terms of the transaction, Didi will issue shares as consideration in exchange for Uber’s assets. The securities represent a 6 per cent preferred equity interest in the merged entity, which, as reported by the New York Times, is worth approximately USD 35,000 million.

While Uber has been successful in North America, it has made a USD 2,000 million loss in China and has yet to profit from other emerging markets, according to Bloomberg. This has caused a delay on its long-awaited plan for an initial public offering, the news provider noted.  Nevertheless, Uber chief executive Travis Kalanick insisted that his company, which has managed to arrange over 150 million trips monthly in China, has been more successful in the country compared to other US technology firms that are still struggling to penetrate the market.  He views his partnership with Didi positively and stated that the merger “frees up substantial resources for bold initiatives focused on the future of cities, from self-driving technology to the future of food and logistics.

According to the New York Times, unlike other US firms that control their Chinese operations from their home country, Uber has established local teams aimed at tackling domestic competition more effectively. Despite that, Uber was still largely hindered by the challenges it had to face in China, the newspaper reported.  These include Didi-backed Tencent blocking Uber’s advertisements on its messaging app WeChat, China’s largest social network. At the same time, Uber was also battered by unscrupulous drivers who faked rides to get paid. Adding to its woes was China’s recent move to ban rides from operating below cost, which, in effect, prohibits the pay out of subsidies. This might have been a major blow to Uber as it had previously relied on expensive subsidies to attract drivers.

In June this year, Didi successfully raised around USD 4,500 million from Internet giants, most notably Apple, Alibaba and Softbank. This gave Didi more ammunition to take on Uber, especially after the latter had also completed funding rounds from several high profile investors, including, Microsoft and Qatar Authority Investment, in both 2015 and 2016. The amount of proceeds received by Uber during the period is estimated to be at least USD 9,400 million, according to Zephyr, the M&A database published by Bureau van Dijk.

Uber continues to face competition elsewhere in Asia. Singapore-based taxi app provider Grab (Uber’s arch-rival in Southeast Asia), is currently planning to raise about USD 1,000 million from investors including Didi and SoftBank. Commenting on the capital increase, Grab’s chief executive stated: “[Uber] lost once, and we will make them lose again”, adding that Didi’s success reinforces what his company has believed all along, the Wall Street Journal reported. In addition to Uber’s asset sale, Didi will invest around USD 1,000 million in the US firm in a separate transaction. The partnership would mean Kalanick and Didi founder Cheng Wei joining each other’s companies as a board member, effectively turning their competitive relationship into a symbiotic one. This may potentially complicate matters with Uber’s other rivals, including Grab, San Francisco-based Lyft and India’s Ola, which are part-owned by Didi.

It will be interesting to see what effects the two big players’ new alliance will have on other firms in the industry down the line. But as far as Uber’s stake in China is concerned, rather than trying to beat Didi, joining its nemesis may very well be its best bet.

© Zephyr