Didi schools Uber on cutthroat China market

Just a year ago, Travis Kalanick told anyone who would listen that China was Uber Technologies’ most pivotal market. He’s since waved the white flag.

Uber is about to join a growing list of U.S. companies that have stumbled in the world’s largest internet market, from Yahoo! and Amazon.com to eBay and Microsoft. It’s capitulating via a deal that will see arch-foe Didi Chuxing buy out its local business to create a $35 billion Chinese ride-share leader, according to people familiar with the matter. Uber and its backers will be left with about a 20-percent economic stake in the enlarged local player, Didi said.

The deal is the culmination of more than a year of a take-no-prisoners war between the world’s two largest ride-sharing companies, a series of clashes played out in the media and on the dusty streets of hundreds of cities. That battle, waged through massive subsidies on rides, wound up costing Uber $2 billion, the people said. Alarmed, its investors clamored for a ceasefire.

In the end, Didi proved too resourceful - and too well-connected - for the ride-sharing giant to dethrone. Uber threw in the towel just days after China banned the practice of charging less than the cost of a ride, depriving the U.S. company of a tried-and-true engagement tactic. In a blogpost obtained by Bloomberg before an official announcement, Kalanick portrayed the deal as a merger that strengthens both parties; others, including Grab CEO Anthony Tan, saw it as a humbled Uber taking its ball elsewhere.

“The road to China has been littered by corpses of foreign technology companies that have tried to operate here unsuccessfully,” said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia. “This could be viewed as a setback for Uber, but it could have been much worse.”

Didi has locked horns with Uber since its creation last year through the merger of start-ups backed by Tencent Holdings and Alibaba Group Holding, the country’s top internet firms. The need to repel Uber, which was starting to ramp up its service, helped drive the two into each others’ arms. The Chinese company held a near-monopoly on taxi-hailing but private-car booking - Uber’s forte - remained up for grabs.

It was the Chinese firm that fired the first salvo: in May 2015, it announced it would give away 1 billion yuan ($150 million) in free rides. Uber refused to back down, responding with its own subsidies. Kalanick, who became a regular fixture on the Beijing conference circuit, including at Baidu World, rallied investors to stay the course. In June, he penned a letter to investors pledging to invest $1 billion in the market that year alone.

The road to China has been littered by corpses of foreign technology companies that have tried to operate here unsuccessfully, Over the summer of last year, both sides raced to attract the cash needed to bankroll their contest. Uber raised about $1.4 billion, including from search giant Baidu. Didi ended up raising about $3 billion at the time from Alibaba, Tencent, Japan’s SoftBank Group and Ping An Insurance (Group). The dueling subsidies grew so large it fomented a cottage industry of scammers who figured out how to cash in on the largesse through fake bookings - without giving anyone a ride.

But Didi proved more creative, and local connections came through. The conflict took an unusual turn as third parties began to get drawn into the mix. In August, Uber complained it had been blocked from WeChat, the popular messaging service run by Didi-backer Tencent. Then Didi recruited allies, forging a four-way alliance with ride-sharing services that compete with Uber, including Lyft Inc. in the U.S., Grab and India’s Ola.

Didi gained confidence as it entered the new year. From President Jean Liu on down, its executives were determined to deal a knockout blow. Didi began raising more money and its emboldened executives openly declared victory.

Recent funding saw Uber’s valuation swell to $68 billion and the company said it had access to more than $11 billion on its balance sheet. Didi, said to be valued at close to $28 billion, had more than $10 billion at its disposal.

Questions now surround Uber’s next move. Does it double-down in India and Southeast Asia against Ola and Grab, the Didis of their respective arenas? Both markets remain relatively under-penetrated and Uber needs to establish a beach-head in Asia to sustain growth. And it’s assured of a foothold in China by dint of its slice of Didi. The two companies even share an uncommon bond: Liu is cousin to senior Uber China executive Liu Zhen. Bloomberg