Uber announced that it is selling its Chinese operations to Didi Chuxing, its great Chinese nemesis. Uber is exiting the very market that its CEO Travis Kalanick declared to be, “the #1 priority for Uber’s global team” in an email less than one year ago. Yesterday, he was more circumspect in a blog post, “As an entrepreneur, I’ve learned that being successful is about listening to your head as well as following your heart.”
On the surface, this may seem like yet another failure of a Western firm to crack the notoriously challenging Chinese market. But, take a closer look and the picture changes. Let’s break it down for the main players.
What Uber gets…
Uber, and its investors, get 20% of the new combined company. With a valuation of $35 billion, that amounts to $7 billion. It also gets a boisterous monkey off its back that was costing it billions and adversely affecting its ability to join the IPO parade. In addition, Uber gets a $1 billion cash investment from Didi Chuxing to fund its global expansion outside of China.
What Uber loses…
Uber loses the opportunity to compete independently in the Chinese market. Thus far, it has lost over $2 billion there and up until yesterday, it was in the middle of a feverish and highly costly price war with Didi Chuxing.
What Didi Chuxing gets…
Didi Chuxing gets to compete as a virtual monopolist in its home market. A new ruling by the Chinese government makes it legal to offer ride-hailing services, so it can enjoy legal and unfettered access to one of the world’s largest and fastest growing economies.
What Didi Chuxing loses…
Didi Chuxing loses 20% of itself, and has to pay $1 billion to Uber. As a side note, Apple invested $1 billion in Didi Chuxing earlier this year, so, in effect, that investment goes to Uber.
To be frank, this is a great deal for both sides. The only loser here is the Chinese consumer. The bitter price war between Uber and Didi Chuxing created an attractive market for riders and drivers.
Without this competition, the newly combined company can raise prices to consumers and restrict the benefits to drivers. It is hard to imagine anyone who can compete with it. Didi Chuxing’s major shareholders include Alibaba and Tencent. The Uber China acquisition brings its investor Baidu with it. Thus, with all three of the BATs on board, there are no obvious challengers left to battle.
This is not an arrangement that would be tolerated in countries with strict anti-trust rules, but it seems likely that the Chinese government will provide its blessing.
In our book, Digital Vortex, we define 4 strategies to respond to digital disruption and Uber has illustrated the most controversial of them: retreat. Choosing the right time to exit a market is important, and Uber has chosen well.
Michael Wade is the Cisco Chair in Digital Business Transformation, and Professor of Innovation and Strategic Information Management at IMD. His interests lie at the intersection of strategy, innovation, and digital transformation.
He is Director of the Global Center for Digital Business Transformation and co-Director of IMD’s new Leading Digital Business Transformation program (LDBT) designed for business leaders and senior managers from all business areas who wish to develop a strategic roadmap for digital business transformation in their organizations.
He is also co-director of the Orchestrating Winning Performance Program (OWP).
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