The competition between Uber and its Chinese rival, Didi Chuxing, is often described by the business media in violent terms: a “battle,” a “bruising” fight, with the two companies “bleeding” cash.
For everyone else, though, it wasn’t bruising at all. The two companies competed to lure drivers and riders, offering subsidies to both groups. Riding in a vehicle for hire in China, or driving one, has been a blissfully good deal, driven by what the Financial Times called the “game of subsidy one-upmanship that has come to define the Chinese ride-hailing market.” For starters, Uber had to develop a totally different model for compensating drivers than the one it uses everywhere else, which caused the company to lose more than $1 billion in China in 2015 in its efforts to gain dominance there.
That era officially came to an end on Monday, when the two companies announced that Uber China—Uber’s only independent subsidiary—would be folded into Didi. The Chinese company announced it had acquired Uber China; Uber CEO Travis Kalanick painted the deal as a merger.
Either way, the consolidation will help fulfill the terms of China’s new ride-hailing laws, which were released last week and stipulated that “online ride-booking companies … must not set prices below cost to push out competitors.” Uber’s investors, who had reportedly urged the company’s leadership to throw in the towel in China (following the lead of other U.S. tech companies like Google and Yahoo), will be pleased.
Per the deal, Uber will own almost 20 percent of Didi; Didi will invest $1 billion in Uber. Didi, already on its way to profitability in China, will get there faster, and Uber will reap some of those gains.
The deal also brings Uber into a closer—and complex—relationship with Didi’s other affiliates. Didi had invested $100 million in Lyft, for example, which means Uber will soon have a small investment in its U.S. rival. (A spokesperson for Lyft said in a statement that the company will re-evaluate its partnership with Didi over the next few weeks.) Apple had invested $1 billion in Didi, which has now invested that same amount in Uber. Google has invested in Uber, so it too now owns a part of Didi.
This tangled web, Erin Griffith writes at Fortune, “is starting to remind me of the complaint about mutual funds being so diversified they don’t encourage competition. (In other words, who cares who wins? They own a piece of everything!)”
It’s Uber’s first merger, and it raises the question of whether the company—rumored to be preparing for an IPO—wouldn’t try to establish similar deals elsewhere, rather than spend hundreds of millions on subsidized rides to drive competitors out of business. In India, for example, Uber’s main competitor is Ola—a company in which Didi has a big stake. Didi, meanwhile, now has a stake in Uber, Lyft, Ola, and Grab, a taxi company in Southeast Asia. What happens to those rivalries now? On the other hand, Uber China was the company’s only independent branch. Combining operations elsewhere would be more complicated.
Generally, though, the decision suggests that ride-hailing startups are about to get more cooperative and less competitive. It’s the beginning of the end of a bruising period for investors—and, possibly, the start of one for riders and drivers.