Uber may have won the world by ceding China

Article Source: SF Chronicle
Original Post Date: August 1, 2016

Uber

By conceding a costly battle for riders and drivers in China, Uber is clearing the field to win a worldwide war for the future of transportation.

In a rare retreat, Uber has admitted that it was outgunned in the Chinese market, and will partner with its larger rival there, homegrown company Didi Chuxing, which controls over four-fifths of the Chinese ride-hailing market.
This means Uber’s resources are now freed up to focus on other markets and an eventual public offering, experts said. Meanwhile, Lyft, Uber’s U.S. rival, is taking a body blow as its own partnership with Didi — a cornerstone of its plans for international expansion — is now overshadowed and likely in jeopardy.

“This gives Uber participation in the upside and a dominant position in the market in China,” said Steven Davidoff Solomon, co-director of the Berkeley Center for Law and Technology and a UC Berkeley law professor. “My sense is that Uber shareholders and other investors felt there was more revenue and more growth to be had by combining (with Didi). In China commerce can be political.”

Uber is selling its China business to Didi, and will take a 20 percent stake in the combined $35 billion company — which is guaranteed to be the dominant player in China. Didi in turn will invest $1 billion in Uber.

“As an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart,” Uber CEO and co-founder Travis Kalanick wrote in a blog post. “Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there. 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.”

He will gain a seat on Didi’s board, while Didi founder Cheng Wei will join Uber’s board.

In February Kalanick said that Uber was losing over $1 billion a year in China, a heavy burden even for a company with Uber’s deep pockets. But its price wars with Didi were already coming to an end. China last week said it would legalize ride-hailing in November, but would bar companies from setting rates artificially low “to push out competitors or dominate the market.” That pending change may have forced Uber’s hand.

“This big losers here are Chinese customers who were getting these incredible subsidized rides,” said Patrick Chung, founder and general partner of Xfund, an early stage VC fund in Palo Alto that does not invest in any ride-hailing companies. A friend in Shanghai recently took a 12-mile Uber ride for the equivalent of $1.80, he said. “Consumers have been treated to free rides from Uber’s and Didi’s investors.”

Another big loser may be Lyft, which had pinned its international strategy on partnerships with the likes of Didi. The Chinese company invested $100 million in Lyft last September. The Uber-Didi deal means Uber now has an indirect stake in Lyft.

Lyft and Didi joined forces in December with India’s Ola and Southeast Asia’s Grab in a global anti-Uber alliance, agreeing to share technology, local market intelligence and other resources. In June, Lyft said it was beta-testing an innovative new feature allowing Lyft, Didi and Grab customers to book rides from any of the others when traveling to their home turfs. It’s unclear whether Didi customers in the U.S. instead will be diverted to ride with Uber. Just as unclear: Will Uber join the consortium, even though Ola and Grab remain rivals?

“We always believed Didi had a big advantage in China because of the regulatory environment,” Lyft said in a statement that had a whiff of sour grapes. “The recent policy changes are exactly why we did not invest in the region. Over the next few weeks, we will evaluate our partnership with Didi.”

“Lyft is in a tough situation,” said Ajay Chopra, a general partner at VC firm Trinity Ventures, which does not have investments in ride-hailing companies. Lyft, with no overseas business of its own, trails Uber in the United States. In March, for instance, Uber gave 50 million U.S. trips versus 11 million on Lyft, according to Bloomberg. Lyft’s private valuation is about $5.5 billion, a fraction of Uber’s $68 billion.

“Lyft won’t be able to grow internationally because the Asia markets are already absorbed by Didi and the consortium, and Uber is already very strong in Europe,” Chopra said.

In June Lyft reportedly engaged Qatalyst Partners, an investment firm that helps tech companies find investors and buyers. Now possible outcomes could be Lyft selling itself to General Motors, which already has a $500 million stake in Lyft. There’s also a chance that Uber could buy it.

“Uber could decide in one fell swoop to remove all competition in the U.S. market” by buying Lyft, Chopra said, noting that that would raise antitrust concerns.

 

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