Why Didi Chuxing is buying Uber in China
Source: Elizabeth Dwoskin
A man checks a vehicle at an Uber event in Los Angeles. Uber's archrival in China, Didi, is buying Uber's China operations. ( Mark Ralston/AFP/Getty Images)
Uber’s quest for global dominance has long seemed unstoppable.
But, like many tech companies before it, the ride-hailing juggernaut has hit a wall in China.
Didi Chuxing, Uber's archrival in China and the largest ride-hailing service in the country, is buying Uber’s China operations.
The deal has a lot of advantages for Uber, which is privately valued at $68 billion. The San Francisco company will receive a $1 billion investment from Didi, according to individuals familiar with the agreement. Uber, which will maintain its brand in China under Didi's ownership, will receive a 17.7 percent stake in Didi, according to a press release sent from Didi. The terms are evidence that Uber put up a strong fight and that both sides had a lot to gain from a partnership.
Cheng Wei, founder and CEO of Didi Chuxing, said, “Didi Chuxing and Uber have learned a great deal from each other over the past two years in China’s burgeoning new economy," he said in the release. "This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level.”
The Chinese market, with its 1.3 billion consumers and its rising middle class, has long been a holy grail for U.S. technology giants. But few have succeeded there. Google and Facebook have pulled out or been blocked in the country, respectively. Amazon is struggling to make headway. Breaking into China is getting harder, U.S. companies have said, because China’s technology industry has grown more powerful.
Uber founder Travis Kalanick pursued the China market fiercely, and has made dominance in China a top priority. He visits the country frequently — attempting to woo everyone from local government officials to city police forces, which had cracked down on ride-hailing services (China legalized ride-hailing services in July). His first call in the morning was to his colleagues in China, the individuals said. The company entered the China market in 2014.
But the battle with Didi was costing both companies huge sums of money. Uber reportedly spent $1 billion last year. In China, they were neck-in-neck in a race to the bottom, frequently lowering their prices to lure consumers and constantly raising money to outdo the other. In the end, neither company was profitable in China.
At some point, it looks as if reality set in.
Selling itself to Didi was a way for the company to stay competitive in China without burning through its cash. The merger will tie the fates of the two companies, both of which have global ambitions, together. As part of the deal, Baidu and other Chinese shareholders of Uber will also receive a 2.3% economic interest in Didi Chuxing. Under the agreement, Didi Chuxing will also obtain a minority equity interest in Uber. Cheng Wei, founder and chairman of Didi Chuxing, will join the board of Uber. Kalanick will join the board of Didi Chuxing.
One big benefit Didi may get from the deal are software algorithms that Uber has developed. For far longer than the four-year-old Didi, Uber has invested in hiring data scientists and engineers who write code to match drivers with passengers, essentially triangulating people’s locations in real-time and then predicting supply and demand. Top talent in data science is still hard to come by, said Didi Vice President Stephen Zhu, in a recent interview with The Washington Post. To help identify and recruit talent, the company announced a $100,000 prize in machine learning — a branch of computer science associated with artificial intelligence, prediction, and data mining — in the U.S. earlier this year.
In the long term, Didi’s success will depend on its artificial intelligence algorithms, Zhu said. “Every user and driver have their own preferences and patterns — and we have to match them all in a second,”he said. “The core is artificial intelligence, in essence, the pattern of how people move around in big cities."
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