Why Uber's $35B deal with China's Didi matters

Uber has conceded China to local rival Didi Chuxing in a deal that ties the two companies together internationally -- with Apple involved too.

Uber

Uber has surrendered the driver's seat in China.

The US-based ride-hailing company is selling its operation in the world's most populous country to local rival Didi Chuxing. The deal signals the end of a brutal price war between the two companies and links them together both in China and globally. And Apple's involved, too.

In a statement about the deal, Uber founder Travis Kalanick said Uber China "has exceeded even my wildest dreams." But he acknowledged a sobering reality: "Uber and Didi Chuxing are investing billions of dollars in China and both companies have yet to turn a profit there."

The new company merging Didi and Uber China is expected to be worth around $35 billion (around £19 billion or AU$46 billion).

Uber CEO Travis Kalanick delivers a speech in Beijing in June 2016.

VCG/Getty Images

The sale marks a rare setback for Uber. Since its debut in San Francisco in 2011, the app-centric challenger to established taxi businesses has grown to more the 500 cities in dozens of countries. Along the way it has become one of the world's most valuable startups, logged more than 2 billion rides and spurred a number of similar services such as Lyft.

"Uber's business model relies on being first," said Professor John Colley of Warwick Business School in Coventry, England.

By subsidizing drivers and offering heavy discounts to passengers, Uber has historically forced itself into new markets and quickly built up a critical mass of drivers and passengers. "However," said Colley, "in China, Didi Chuxing got there first."

China presents unique challenges to companies like Uber. "Chinese markets have been the graveyard for many Western businesses," said Colley. "Markets are very competitive. Technology and know-how are difficult to protect and retain. Frequently competitors are government-owned and do not have to make a return."

Western businesses coming to China often forge a relationship with a local concern. Uber has poured $2 billion into China, but is still only a fraction of the size of its homegrown rival. Formed by the merger of Didi Dache and Kuaidi Dache in 2015, Didi operates in more than Chinese 300 cities compared to Uber's 60.

With the fight over the Chinese market now apparently settled, Uber can stop bleeding money there. That's a major obstacle removed from Uber's path to an initial public offering. But the company has been raising billions in venture capital and, according to Kalanick, is in no hurry to go public.

The merger will see Uber and Didi linked both inside and outside China. In China, backers of Uber China will own 20 percent of the merged operation. Internationally Didi will have a $1 billion stake in Uber Global, the ride-sharing app's parent company. Kalanick will join Didi's board, and Didi's Cheng Wei will sit on Uber's board.

That's interesting because Didi has relationships with Uber's competition outside of China too. Didi has a stake in ride-sharing services Grab in Malaysia and Ola in India. And it has a partnership with Lyft, one of Uber's main stateside rivals.

The Uber-Didi deal has implications for companies in other lines of work. Search giant Baidu, one of China's trio of online powerhouses with Alibaba and Tencent, is an investor in Uber China. Alibaba and Tencent, meanwhile, are major backers of Didi.

So too is Apple, to the tune of $1 billion. In other words, following today's news, Apple has links across the ride-sharing industry. That could be significant for Apple's top-secret car-related Project Titan, which is rumored to potentially involve a ride-sharing element.

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