Didi is one of the first Apps I installed when I came to China for my latest project. Since then, it has hit news headlines with increased frequency. This week, the acquisition of Uber China by Didi has been a major highlight across the media. Uber China has handed over its assets, including brands, data and operations, to Didi in return for a 17.7% stake in the combined company equity.
The transaction seems to be reasonable from Uber’s perspective. Uber has fought competitively to gain market share, and yet still lagged behind. According to a research paper published by CNIT-Research, in the first quarter of this year, Didi was the market leader in the taxi hailing market with over 85.3% of orders, while Uber had around 7.8%. With this lag in market share and faced with a strong innovative competitor, who had recently raised substantial investment of $7.3 billion this June (which included Apple and former investor Tencent), Uber would have been facing higher costs.
Uber’s challenges would have been further intensified by new regulations in place, stemming from the recent legalisation of the ride-hailing business by the Chinese government. In addition, while Uber has so far adapted well to the Chinese market particularities, e.g. by switching away from Google maps, which has limited coverage in China, to other map service providers, the company would still have had to learn more about the Chinese consumer habits and find a way to address them (e.g. payment systems).
By giving away its Chinese operations, Uber can minimise its costs, focus on its core markets, take other initiatives and prepare itself for an upcoming IPO. Furthermore, if Didi grows in the future and becomes more valuable, Uber could be reaping good returns.
Uber’s well founded decision is backed by both Uber’s experience in the Chinese market and Travis Kalanick’s insights as entrepreneur:
“(…) as an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart”
This deal is not only positive for Uber, but also for Didi. With this step, Didi has been able to eliminate its major competitor in China. In addition, it will be able to decide the future strategic direction of the company (Uber only has 5.89% voting rights). Finally, the combined value of the transaction adds up to $35 billion ($28 billion for Didi and $7 billion for Uber China), giving Didi a size advantage for future operations and its own potential IPO.
While Uber and Didi are the clear beneficiaries of this deal, the consequences are not yet so clear for other market participants. On the one hand, global competitors such as Lyft, Ola and Grab Taxi will face uncertainty and competitive pressure. On the other hand, taxi drivers and consumers will probably experience changes. In particular, consumers are worried that less competition might mean higher prices. However, we will need watch out for further developments to know what will truly happen. First up, the Chinese government must yet evaluate whether the deal passes the anti-trust scrutiny.
Sources/ Further Reading
- New York Times: Uber to Sell to Rival Didi Chuxing and Create New Business in China
- The Economist: Uber gives app
- Chinese Media: 滴滴收购Uber中国背后: 滴滴Uber双赢 有人成大输家 / Uber司机：滴滴让我这几天的订单锐减三分之一