Lyft partners with China's largest ride-hailing service

Ride-hailing company Lyft has long been considered small potatoes compared with its rival Uber. Yes, Lyft is in 65 cities in the US, but Uber is in more than 300 cities in 60 countries. Yes, Lyft is valued at $2.5 billion, but Uber is valued at more than $50 billion.

But that could change soon and quickly.

San Francisco-based Lyft announced Wednesday that it has partnered with Didi Kuaidi, the largest ride-hailing service in China. These two companies both provide services that let drivers connect with passengers via a smartphone app. The partnership will link the two companies' apps, enabling passengers to use their usual app while traveling abroad just like they would at home. Didi is also investing $100 million in Lyft.

"Didi Kuaidi is the clear market leader in China and has invaluable local expertise," Lyft co-founder and President John Zimmer said in a statement on Wednesday. "In today's rideshare environment, where every region presents a unique set of challenges and opportunities, partnering with the homegrown leader is the winning approach to Chinese expansion."

While solely in China, Didi owns a massive share of the overall ride-hailing market with a presence in more than 360 cities and a valuation of $16 billion. The service says it has more than 5 million drivers (Uber has around 1 million) and gets 10 million ride requests per day. The allegiance of Didi and Lyft could pose a serious threat to Uber, which has set its sights on China over the past few months with grand plans for expansion there.

"The partnership between Lyft and Didi allows each to expand into international markets, a necessity if they want to keep up with rival Uber's aggressive global expansion," said Parks Associates analyst Jennifer Kent. "Partnering is a smart strategy, but it remains to be seen if this strategy is enough to compete long-term with Uber."

China's population of 1.35 billion and growing middle class have created a lucrative market for companies, like Uber, to capitalize on. In June, Uber CEO Travis Kalanick reportedly sent a letter to investors that said the company will invest more than $1 billion for its China expansion during 2015. And last week, he announced Uber plans to spread its service to 100 additional cities in China within the next 12 months.

However, Uber has faced roadblocks from Chinese regulators. In May, local authorities visited Uber's offices in Guangzhou and Chengdu to investigate whether it was operating an unlicensed (and thus, illegal) taxi operation. And earlier this year, China's Ministry of Transport called for tighter laws against unlicensed taxis, specifically referring to apps like Uber. Uber didn't respond to a request for comment.

Didi, on the other hand, works with government regulators before launching in local cities. Making nice with regulators has become Didi's competitive advantage in China and why it's been able to add so many new cities in such a short amount of time.

In the past, Lyft has said that it had no immediate plans to enter the international market and now it's clear what its expansion plans are. During a press conference on Wednesday, Zimmer wouldn't say if the company intends to partner with local companies in other countries, like India's Olacabs or Singapore's GrabTaxi. But he did say, "Our vision to connect people in communities with better transportation was never just about the US."

As far as what's in it for Didi, company President Jean Liu said at the press conference that her goal is to continue innovation in the ride-hailing industry and that Lyft is the best partner for that. She noted that Lyft was the first company to let passengers hail drivers using their own personal cars and it was also the first to introduce a carpooling service.

"We think the Lyft and Didi partnership together will open a new global era for the ride-share industry," Liu said. "When we work together we will be able to push the evolution of this industry to the next level."

Update, September 17 at 4:25 p.m. PT: Added comment from Parks Associates analyst Jennifer Kent.