San Francisco-based ride-hailing giant Uber Technologies Inc. gave up on competing in China after suffering heavy losses in its attempts to acquire market share in the country.
The company announced on Aug. 1 it is selling its Chinese arm to the biggest local rival Didi Chuxing (“Beep Beep Travel” in English), in a deal that would value the combined company at $35 billion.
“Three years ago I traveled to China with a small group of people to see if we might be able to launch Uber there,” said Travis Kalanick, Uber’s CEO and co-founder, in an open letter posted on the company’s website.
“Most of the people we asked for advice thought we were naive, crazy—or both.”
Fast forward to today and Uber China—in just two years—exceeded Kalanick’s wildest dreams.
In exchange for the company’s China assets, Uber will receive 5.89 percent of the combined company with preferred equity interest, which is equal to a 17.7 percent share in Didi, according to a press release by Didi. In addition, Chinese search engine company Baidu and other Chinese shareholders in Uber China will receive a 2.3 percent share in Didi.
Ride-hailing firms in China have grown very fast but suffered heavy losses due to fierce competition. According to media reports, Uber lost roughly $2 billion in China in two years. And now it is effectively selling its China business in exchange for a $7 billion share in Didi, which is not a bad deal for Uber shareholders.
In its latest round of fundraising, Uber Technologies Inc. reached a valuation of $62.5 billion, which made the company the most valuable startup in the world. And Uber China raised financing in January, valuing the China business at $7 billion.
In comparison Didi Chuxing raised funds from investors including Apple, Alibaba, and SoftBank in June and reached a valuation of $28 billion. So with the acquisition of Uber China for $7 billion, Didi’s valuation rose to $35 billion.
As part of the deal, Didi Chuxing will also invest $1 billion in Uber’s global company. Cheng Wei, founder and chairman of Didi, will join the board of Uber, while Travis Kalanick will join the board of Didi, according to the agreement. And Uber China will remain as an independent brand and business operation.
Why Do US Tech Firms Leave China?
The announcement marked the latest surrender by an American technology company in the face of intense competition in the world’s biggest market. In the last few decades, American technology giants allured by China’s massive population have been trying to gain a foothold in the country.
They risk billions of dollars investing in China, with big hopes, like Kalanick. “If you have the opportunity to build both Amazon and Alibaba at the same time, you’d be crazy not to try,” he explained in the letter.
However, tech firms face tough times once they enter China. Some experience strict government licensing and censorship, like what Google Inc. encountered, for example.
Google entered China in 2000 but had to shut down its operations due to censorship imposed by the Chinese Communist Party and a cyber attack from within the country. Google disclosed in 2010 that Chinese hackers had penetrated the Gmail accounts of Chinese human rights advocates in the United States, Europe, and China and had threatened the company. As a result, Google had to withdraw its operations in the country.
China has barred access to Facebook, YouTube, and Twitter since 2008-2009.
In addition, U.S. e-commerce platforms like eBay and Amazon lost the battle in China to local rivals like Alibaba and Tencent. Local firms are backed by strong funding and the government policies that often favor domestic players.
With hopes to become a dominant marketplace in China, eBay entered the market in 2002. However, it had to withdraw in 2006, after investing $250 million, because it couldn’t compete with Alibaba.
The Right Time to Exit?
“We’ve grown super fast and are now doing more than 150 million trips a month. This is no small feat given that most U.S. technology companies struggle to crack the code there,” Kalanick stated.
Exiting China seems like the best strategic decision for Uber, according to Kalanick, given the challenges and a huge cash burn.
“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 stated.
The decision to sell Uber China came after China’s ministry of transportation issued preliminary rules to legalize ride-sharing on July 28. The rules were more advantageous to the state than to the businesses in the car-hailing industry.
In one fell swoop, the Chinese Communist Party both legitimized the industry and brought it under its tight control.
For example, Article 5 of the new rules requires the ride-sharing companies to establish physical servers in China and store user information and car-related data within those servers for two years. While the ministry of transport did not name any specific company, this stipulation seemed to be aimed directly at Uber China.
Without providing specifics, Beijing also announced that pricing would be scrutinized. This was interpreted as a threat to Uber China’s strategy to attract new customers using aggressive and below cost pricing.
“This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level. Didi Chuxing commits all our energy to work with regulators, users, and partners to meet the transportation, environmental, and employment challenges of our cities,” Didi stated in the press release.
Didi Chuxing was formed in February 2015 by two competing ride-hailing services launched by internet giants Tencent Holdings and Alibaba Group.
Didi currently serves 300 million users across over 400 Chinese cities, according to the press release. Research firm Analysys International estimated Didi had 42.1 million active users in May while UberChina had 10.1 million.