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Uber sells to Didi Chuxing as US companies struggle to break into China (+video)

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Kim Kyung-Hoon/Reuters/File

(Read caption) Didi Chuxing's logo is seen at its Beijing headquarters.

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In a deal announced on Monday, UberChina will merge with Chinese ride-hailing service Didi Chuxing, creating a ride-hailing company worth an estimated $35 billion.

The deal will give Uber a 20 percent stake in Didi Chuxing. In turn, Didi has agreed to to invest $1 billion in Uber’s global operations and operate UberChina as a separate brand. Uber’s chief executive Travis Kalanick will join Didi Chuxing’s board, and Didi chief Cheng Wei will sit on Uber’s board.

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“This merger paves the way for our team and Didi’s to partner on an enormous mission, and it frees up a substantial resources for bold initiatives focused on the future of cities -- from self-driving technology to the future of food and logistics,” Mr. Kalanick wrote in a company blog post on Monday.

Uber’s merger demonstrates the difficulties American companies face when venturing into the Chinese market, where it has been historically difficult for foreign businesses to turn a profit. The growth of Google, Facebook, and Twitter in China has slowed because of censorship by the Chinese government, and eBay has struggled to gain footing there amid strong competition in the company's online retail market. Yahoo sold its China-based business to Alibaba in 2005 in exchange for a stake in the e-commerce giant.

Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong, told Bloomberg, "China is such a tough market, in terms of regulation, competition and culture; [Uber] faced challenges on so many fronts. Cooperating with rather than fighting Didi might not be such a bad idea."

Didi Chuxing has dominated the Chinese ride-hailing market since its entry. The company, which now has over 300 million active users, started in 2012 as an app that helped taxi drivers find passengers. In 2014, when the company switched to a ride-hailing service model, it did so with over 100 million users. In a country where market share is a critical factor to success, Didi had a strong early advantage over Uber.

Didi is backed by tech giants Alibaba and Tencent, as well as Apple, which invested $1 billion in Didi in May. Uber has faced challenges advertising in China because of Didi’s investors. Didi investor Tencent, for example, owns WeChat, China's largest social media platform, which has limited Uber's ad presence there. 

Both Didi and Uber have poured billions of dollars into fostering a bigger share of the ride-hailing service market, with little to no profit thus far. Uber, knowing that it is difficult for American companies to thrive in China, had promoted an intensely local business model, hiring local employees who operated the brand with a fair amount of autonomy.

Last week, the Chinese government released guidelines legalizing ride-hailing services. Though these new measures would allow Uber and Didi drivers to operate without fear of arrest, the guidelines put Uber at a disadvantage.

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One of the new rules requires ride-hailing services to operate at cost, effectively staunching efforts to heavily subsidize rides in order to lower costs and grow one’s user base. It was a frequent practice of both Didi and Uber, but because Didi’s user base is already so large, the rule makes it difficult for Uber to compete with Didi’s prices. The guidelines have the potential to slow the growth of smaller Chinese competitors Yidao and Shenzhou.

Even with the merger and the prompt exit from Chinese markets, Uber faces global competition from Didi elsewhere. Didi is an investor in other ride-hailing services around the world, including Grab in Southeast Asia and Ola in India. In a company-wide email Sunday, the chief executive of Grab, Anthony Tan, wrote, “Didi’s success reinforces what we have believed all along. That we live in a very diverse world and there is no one-size-fits-all answer. Localized solutions best solve local problems.”