Ride hailing company, Didi Chuxing will invest $1 billion in Uber as part of a deal to acquire its Chinese subsidiary.
Uber China failed to make any profit since its launch in 2014, having aggressively pursued a market dominated by local taxi-hailing platform Didi Chuxing.
Didi Chuxing was formed in 2015 by the $6 billion merger of China’s two largest cab hailing apps, Didi Dache and Kuaidi Dache, covering 87 per cent of the largest market in the world. Having just entered China, Uber had a huge challenge from the outset, competing with Didi Chuxing and its deep pockets.
The Chinese transportation monolith had just secured hefty investments from global e-commerce and internet companies Alibaba and Tencent. Despite raising around $1.2 billion from Chinese heavyweights like Baidu, China Life, and Guangzhou Automobile, Uber China failed to turn profit.
In comparison, Didi Chuxing was on the upward path, raising more funds and tapping into supplementary sectors, including chauffeur-driven services.
After the dust settles
In addition to Uber China operating autonomously as a subsidiary of Didi Chuxing, its shareholders will receive a 20 per cent share in the new merged company. Bloomberg reports that Uber China investors will collectively have a 2.3 per cent stake in Didi Chuxing.
Interestingly, this deal will make Uber the largest shareholder in Didi Chuxing, alongside regional and local businesses, like Singapore’s Temasek Holdings, China Investment Corp, Capital International Private Equity Fund, insurance firmPing An, and Coatue Management.
Didi Chuxing was valued at $28 billion in its last funding round, while Uber China was valued at $7 billion.
As a primarily effect of this deal, both Didi Chuxing and Uber China can focus on focussed growth rather than expending time, effort and money in competing with one another, says Jonathan Buxton, head of the consumer group at Cavendish Corporate Finance.
“After spending billions trying to dominate the market and with neither being able to turn a profit, it’s no surprise that Uber and Didi Chuxing have finally decided that co-operation not competition is the best way forward,” Buxton adds.
“Both companies’ backers had wearied of the losses, with Uber’s investors, in particular, worried that it might jeopardise any potential IPO. Ironically for Uber, the deal comes shortly after Chinese regulators last week legalised the online ride-hailing industry in China providing a legal framework for taxi-ordering apps,” he explains.
A potential monopoly?
The ride sharing regulations set price markers, including a minimum market rate for rides, making it difficult for players in the space to compete on price, in an effort to level the playing field.
Buxton voices the main concern for commentators following this merger: where does this deal leave Didi’s global ambitions? The company had agreed to work with Uber’s American competitor Lyft, India’s Ola and Southeast Asia’s Grab to create an international network of cab hailing firms to take on Uber’s popularity.
With this deal, Uber and Didi Chuxing officially hold stakes in each other, which may dissolve other relationships, and potentially overshadow others in the global market. Analysts estimate that Didi Chuxing and Uber China may jointly have won 95 per cent of China’s cab hailing market. The threat of a monopoly is very real.