Uber China-Didi Deal: Who Gains? Who Loses?
By Wen Xin Lim

Uber China-Didi Deal: Who Gains? Who Loses?

Aug. 05, 2016  |     |  1 comments


There is a saying, “If you can’t beat them, join them.” Uber, the world’s most valuable ride-hailing startup with more than USD 13 billion in funding, has agreed to merge its China branch with Didi Chuxing, after suffering from a grueling price war with the local rival. The truce was achieved with Uber selling Uber China operation to Didi Chuxing in exchange for a 20 percent in the merged entity, while the Chinese ride app juggernaut Didi Chuxing invested USD 1 billion into Uber. The combined company is now worth USD 35 billion, which is made up of Didi’s latest USD 28 billion valuation and USD 7 billion value for Uber China.


Some compared Uber’s “embarrassing defeat” with the ill fates of other US internet companies — Google, Facebook, Yahoo and Ebay — which had also tried to penetrate the Chinese market. They attributed these failures to China’s legislations that tilts in favor of local companies. In fact, many factors lead to the frequent defeats of US-based companies in China. Failing to incorporate the local business practices, the complicated Chinese market, feisty competition, varying consumer’s behavior and the foreign context are challenges that US internet giants need to overcome.


However, the pertinent question here is, who gains and who is likely to lose out from the Didi-Uber merger?


Win-win for Didi and Uber


What looks today like Uber’s capitulation may tomorrow look like a strategic and well-planned retreat that helped Uber to win a global war, yet continue to tap into the enormous Chinese market. Under the agreement, Uber China will maintain independent branding and business operations in China to ensure stability and continuity of service for passengers and drivers.


Uber’s surrender in the Chinese market is not bad at all in the long term. By turning over its operation in China, it effectively gets rid of the taxing financial burden to pay for drivers’ and riders’ subsidy — costing USD 1 billion each year — to compete with Didi Chuxing in the expensive price war. Ending the costly battle means it can now channel its capital to other foreign market where it stands a higher chance to win.


“Uber and Didi Chuxing are investing billions of dollars in China, and both companies have yet to turn a profit there,” said Uber Chief Executive Officer Travis Kalanick in a blog post. “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.”


On the other hand, what can Didi Chuxing gain from the amalgamation? Didi is buying Uber’s brand, business and data in the country, the Chinese company said in a statement. Also, Didi Chuxing will integrate the managerial and technological experience and expertise of the two teams, which is likely to help pave way for its endeavour to expand overseas as it started to invest in other ride-hailing titans such as Lyft in the United States, Ola in India and Grab in Southeast Asia one year ago.


The deal that looks like a defeat is actually a shrewd move between the two companies — which share a lot of commonalities — after being pressurized by their external investors. One of the biggest connections that should not be overlooked is the family ties that link the companies. Liu Qing, the President of Didi Chuxing, is the daughter of Liu Chuanzhi, founder of Lenovo, who is also uncle to Liu Zhen, Uber China’s head of strategy. When the duopolies merge to become a monopoly, creating a company with a combined market share of well above 90 percent, it definitely should not be viewed simplistically as a game of pride, taking into consideration the cousin relationship of both companies’ leaders.


Who are the Biggest Winners?


Zooming in to take a closer look at the investors behind these two companies: Apple, Tencent, Alibaba, Baidu, Softbank, Google, Microsoft and Amazon all played a part and their investment had paid off with the conclusion of the deal.


Microsoft and Google were already investors in Uber in the United States, and Baidu invested USD 1.2 billion in the company in 2015. Google Ventures also made its largest investment to date in Uber, pouring USD 258 million in the company in 2013.


Didi Chuxing in its current form is a combined entity of two other taxi calling applications, Didi Dache and Kuaidi Dache. Coincidentally, Kuaidi Dache was backed by Alibaba and SoftBank (USD 600 million), while Didi Dache was funded by Tencent (USD 3 billion). In May, Apple made an announcement to invest USD 1 billion in Didi Chuxing, which in Tim Cook’s words is to better partner with the local incumbent and to “learn more about Chinese business and market.”


Among all, Apple is likely to benefit the most. Not only does it gain from the latest valuation of the combined entity at USD 35 billion, a 20 percent increase from USD 28 billion from before, it can also tap into the technology, operating system, road map knowledge and expertise of Didi and Uber for its long term plan of the Apple Car, which was originally scheduled to roll out by 2020. That is also a strategic move to compensate for its recent revenue drop as it faced several bumps including the shutdown of its iBooks and iTunes movie store in the tantalizing yet challenging Chinese market.


Cracks in the Anti-Uber Coalition?


Before the deal, Didi had a leading role in the nascent anti-Uber alliance, which consists of several Uber’s rivals — Lyft in the United States, Ola in India and Grab Taxi in Southeast Asia — to keep Uber at bay. Alongside that, Didi made investments in its three allies: putting USD 100 million in Lyft, and contributing undisclosed minority amounts to Ola’s USD 500 million round last year and Grab’s most recent USD 350 million raised one year ago.


Now that Didi had decided to merge with its “sworn enemy”, solidarity within the coalition could be at stake. It really creates a great uncertainty in the anti-Uber alliance and complicates the relationship of these transportation companies (Table 1).


It is now difficult to say if Didi will still lend support to its anti-Uber allies. At the end of the day, profit maximization and market dominance could matter more than friends in times of hardship.


Table 1. Relationship of Different Ride Hailing Companies



The One Who Truly Loses Out


While the merger will bring the long-lasting subsidy war between Uber and Didi to an end, consumers and passengers could now suffer as the joint entity now forms a transportation monopoly with over 90 percent of the market share in hand.


It was reported that the company has started to cut down on subsidy and promotion one day after the mega marriage.


“My ride nearly doubled in price,” complained one user named Longdidongruirui on Weibo, while one Uber journey in Beijing that has regularly cost RMB 10 (USD 1.50) for the past year cost RMB 19 on Tuesday morning, as the normal discount was not applied. There are also concerns about driver and service qualities in the near future.


On the other hand, taxi drivers are worried about their livelihood after the rollback on cash subsidies. Their morale and motivation to work were affected due to the cut in monetary incentive. Some Uber’s drivers opined that they felt confused and uneasy with their new identity as they now need to fit into the culture of Didi, which was previously deemed to be the main rival of Uber.


Will the Monopoly Be Regulated?


Chinese regulators legalized the online car-booking service in June, with the law taking effect on November 1, 2016. However, it is hard to define the “relevant market” — taxi, online ride-hailing, carpool, premium cars service — and the scope of services involved in this industry. This, to a large extent, has complicated the anti-monopoly law (AML) enforcement.


China’s anti-monopoly law is relatively new and in the midst of perfecting itself. After 13 years of drafting, deliberation, discussion and consultation, China’s anti-monopoly law was finally passed in 2007 and came into force on August 1, 2008. China has three anti-trust bodies which are responsible to execute the AML. This is very different from other countries where Japan only has one enforcer for its Anti-Monopoly Act and the US only has two. The intricate system that led to an ineffective enforcement of the AML has invited much criticism as judgement and approach vary across different agents with different interests.


Correspondingly, the harsh scrutiny of foreign corporations and the lenient regulation on domestic mergers has led to accusations of protectionism. With China’s traditionally lax attitude towards local monopolies, it is likely that this monopoly will be left unregulated for a while.


Overall, the ecosystem of the Chinese internet industry has become increasingly monopolistic, with gigantic firms dominating the once vibrant internet environment and creating barriers of entry. This has adversely affected the vitality of the digital market, and without proper government supervision and intervention, the victory of the laissez faire capitalism can easily cause a reversal to the development of human welfare.



1 Comments To This Article

  • dasein
    dasein

    on Aug 06, 2016 at 02:34 PM - Reply

    1

    Well said!

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