Concluding a vicious, money-losing ridesharing price war in China, overnight Didi Chuxing, the dominant ride-hailing service in China, announced it would acquire Uber’s operations in the country, ending a battle that cost the two companies billions as they competed for customers and drivers.
As reported early in the overnight session, Didi said it would Uber’s brand, business and data in the country. Uber will receive 5.89% of the combined company with preferred equity interest equal to 17.7 percent of the economic benefits. According to the Didi statement, Uber China’s other shareholders, including search giant Baidu Inc., will get 2.3% of the economic interest in Didi Chuxing. Didi founder Cheng Wei and Uber Chief Executive Officer Travis Kalanick will join each other’s boards.
After the merger, Uber will become the largest shareholder in Didi. The Chinese ride-hailing company will also invest $1 billion in Uber as part of the deal, a person familiar with the matter said.
As Bloomberg reports, “the truce brings to an end a bruising battle between the two companies for leadership in China’s fast-growing ride-hailing market. Uber has been spending at least $1 billion a year to gain ground in China, while Didi offered its own subsidies to drivers and riders to build its business.”
“Didi Chuxing and Uber have learned a great deal from each other over the past two years,” said Cheng, who is also CEO, in the statement. “This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level.”
Bloomberg adds that Didi’s valuation after the deal will be $35 billion.
The deal is the latest consolidation in China’s critical ridesharing industry. Last year, China’s ride-hailing leaders Didi and Kuaidi joined forces, creating a homegrown juggernaut to fight off Uber. The merged company Didi Chuxing brought together backers Alibaba Group and Tencent Holdings, the country’s most valuable internet businesses. In 2016, Apple also joined the ownership structure with a $1 billion investment in Didi, in a round that valued the company at about $28 billion.
As the WSJ summarizes, Didi has been a formidable fundraising machine, refusing to back down as Uber poured billions in subsidies into China. Didi raised $7.3 billion in its latest fundraising round in June, which included a $1 billion investment from deep-pocketed Apple. For Didi, Uber’s global stretch could help the Chinese firm grow its business overseas. When Uber announced a partnership with Ant Financial’s Alipay mobile payment system earlier this year, it propelled Alipay into 69 countries; previously it was only in a handful of markets.
The Chinese government passed a new rule last week that legalized ride-hailing services, paving the way for further expansion of these businesses, and a move that many expected would be beneficial for Uber. However, realizing that growth upside in China is futile as a result of the government’s eagerness to promote home-grown business, Uber’s investors had been clamoring for the company to sell off its China assets and focus on more promising opportunities.
“China is such a tough market, in terms of regulation, competition and culture; they faced challenges on so many fronts,” said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong. “Cooperating with rather than fighting Didi might not be such a bad idea.”
Uber has lost more than $2 billion in the country. Meanwhile, Uber was profitable in developed markets in the first half of 2015, the people said.
“As an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart,” Kalanick wrote in a blog post obtained by Bloomberg before publication. “I have no doubt that Uber China and Didi Chuxing will be stronger together.”
As a result of the deal, Uber’s cash burn will drop substantially, although it will largely cede the potential growth associated with the largest global ridesharing market.
Still, while Uber will walk away from operations in China, it is taking a significant stake in the largest player there. By shedding its massive losses in China, the move could help Uber clear the path for an eventual initial public offering.
“Uber and Didi Chuxing are investing billions of dollars in China, and both companies have yet to turn a profit there,” Kalanick wrote in the blog post. “Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term.”
Bloomberg adds that the deal is subject to government approval. While the combination of the top two players in a market would often raise regulatory scrutiny, officials will have to determine the range of competition. “The ministry of commerce has to define the size of the market and see if the car-hailing business Didi and Uber are offering can be replaced by similar services,” said Deng Zhisong, senior partner at Beijing-based law firm Dentons. “If you count taxi services and public transportation, the car-hailing sector will not have a market share that significant.”
Meanwhile, as reported last week, ridesharing in China is becoming a critical interim industry as it has soaked up millions of recently laid off lower skilled workers.
Recall that according to South China Morning Post, Didi Chuxing is claiming to have given more than a million jobs to former heavy industry workers across China, according to new research from the firm. Its study shows there are now 3.89 million full-time and part-time drivers from 17 heavy-industry provinces including Heilongjiang, Shanxi and Sichuan who work for the firm’s private car and chauffeur services.
Out of the drivers it employs who used to work in heavy industry, 530,000 came from those that are undergoing massive restructure, including the coal and steel sectors, the report said. It claims the number represents 60.2 per cent of the Chinese government’s one-year re-employment target for heavy industry workers who have been made redundant, and 29.4 per cent of the five-year target.
“As China undergoes sweeping economic restructuring, Didi is in a unique position to help drivers find flexible work opportunities and better livelihoods with the power of technology as we work together to create more sustainable cities,” he said.
Having become a systemtically important industry, it was clear why the Chinese government was eager to maintain domestic dominance over the increasingly more important industry, which has now become critical in preserving social stability by providing part-time jobs to all those who have been recently fired.
That said, with a main competitor out of the way, and the deflationary “race to the bottom” seemingly over, one wonders if prices won’t go up as a result, and lead to lower demand for a service that is now so important to keeping millions of unskilled workers busy.
via http://ift.tt/2atuwMS Tyler Durden