A BILLION DOLLARS loss here. A billion dollars loss here. Pretty soon you are talking serious red ink.
That is the scale of the annual loss that US ride-sharing service and poster child for the sharing e-economy, Uber, has apparently been making in an effort to break into the China market since 2014. In the face of bitter resistance from local rival Didi Chuxing (app seen above), it has now decided to end the debilitating price war between the two by selling its China operation to its competitor.
The deal struck will leave Uber owning 17.5% of Didi Chuxing, which itself was the fulmination of a merger between Didi Dache and Kuaidi Dache. Didi Chuxing, which also owns a stake in Uber’s US rival, Lyft, will end up with a 90% market share in China (and an estimated market valuation of $35 billion).
The deal comes, ever so coincidentally, within days of China agreeing to provide a legal framework for taxi-ordering apps, which have existed in a grey area. The new rules, due to come into effect in November, will make the heavy discounting that Uber and Didi Chuxing engaged in during their price war illegal.
In that, there may be some succor for Chinese taxi drivers, who, in common with cab drivers in many countries, have been protesting against the new competition of ride-sharing apps which they say is destroying their business.
Didi Chuxing will be able to rebuild its margins, to the pleasure of major shareholders which include Alibaba and Tencent. It is also likely to benefit from the $1 billion it is to invest in Uber’s global operations under the deal, especially once Uber makes its intended initial public offering in the United States.
That share offering will be even more attractive to investors without billion-dollar-losses in China weighing down Uber’s profit and loss account.
There are echoes of Yahoo!’s experience in China. The internet media company sold its China businesses to Alibaba in 2005, along with taking a stake in the Chinese tech group. Regardless of what is happening to Yahoo! now, that China deal paid off handsomely for it.
The model well may be repeated by other U.S. tech companies that are finding doing business in China to be a long and expensive road.