Didi teaches Uber a lesson on doing business in cut-throat China market

A taxi passes by an Uber station outside a shopping mall in Beijing on August 1.
A taxi passes by an Uber station outside a shopping mall in Beijing on August 1. PHOTO: AFP

HONG KONG (BLOOMBERG) - Just a year ago, Travis Kalanick told anyone who would listen that China was Uber Technologies' most pivotal market. He's now waved the white flag.

Uber is about to join a lengthening list of US companies that have stumbled in the world's largest internet market - from Yahoo! and Amazon.com to Ebay and Microsoft.

Uber is capitulating via a deal that will see arch-foe Didi Chuxing buy out its local business to create a US$35 billion (S$46.95 billion) Chinese ride-share leader. Uber and its backers will be left with about a 20-per cent economic stake in the enlarged local player, Didi said.

The deal is the culmination of more than a year of 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 US$2 billion, the people said. Alarmed, its investors clamoured 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 US company of a tried-and-true engagement tactic. In a blogpost obtained by Bloomberg before an official announcement, Mr 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 startups backed by Tencent Holdings and Alibaba Group Holdings, 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 of 2015, it announced it would give away 1 billion yuan (S$202 million) in free rides. Uber refused to back down, responding with its own subsidies. Mr 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 US$1 billion in the market that year alone.

Over the summer of last year, both sides raced to attract the cash needed to bankroll their contest. Uber raised about US$1.4 billion, including from search giant Baidu. Didi ended up raising about US$3 billion at the time from Alibaba, Tencent, Japan's SoftBank Group and Ping An Insurance (Group) Co. 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 in the US, 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.

"We will be the last one standing," Stephen Zhu, vice president of strategy, said in what proved to be a prescient April address.

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

In the end, Didi proved too large an opponent, with backers including some of China's largest government institutions and even Apple. The four-year-old company now handles more than 11 million rides a day and serves about 300 million users across some 400 cities, offering taxis, private cars, ride sharing and test driving.

Questions now surround Uber's next move. Does it double-down in India and Southeast Asia against Grab and Ola, 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.

By shedding its losses in China, the move may clear Uber's path to an eventual initial public offering. And as part of its deal, Mr Kalanick joins Didi's board - literally gaining a seat at the table as the effort to dominate the world's largest ride-sharing arena unfolds.

So never count Uber out, at least on a global level, said Andy Mok, managing director at Red Pagoda Resources in Beijing.

"They want to be a Cisco of the physical world, the network that routes physical people and objects," said Mok. "In a way, this frees up space for more technology development."